TMI Blog2020 (10) TMI 753X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of salary paid overseas to the expatriates of the appellant working in India by the head office and the Indian taxes paid thereon by that office. Addition on account of the interest received by Indian branches from head office and other overseas branches - HELD THAT:- Income earned from head office and overseas branches is not taxable in the hands of the PE in India since they are not separate legal entities and are part of the same foreign company therefore no income can arise when the transactions are carried out by different parts of the same legal entity. It is a settled principle of law that no man can make profit out of himself. Therefore, the interest income earned from head office and overseas branches is not chargeable to tax. Disallowance u/s 14 A on account of the exempt interest income earned on pass-through certificates claimed as exempt u/ 10 [35A] - HELD THAT:- Difference if the income is received as a dividend u/s 10 (34) or is distributed by a securitisation trust which is also exempt u/s 10 (35A) - we are of the view that if these passthrough certificates are held as stock in trade by the assessee and distribution of income is also exempt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t relevant. Taxation of interest received by the assessee u/s 244A of the income tax act on income taxes refund received during the year - in the return of income the interest was offered to tax at the rate of 10% under article 11 (2) of the DTAA - HELD THAT:- This issue squarely covered in favour of the assessee by the decision of the Honourable Bombay High Court in CREDIT AGRICOLE INDOSUEZ [ 2015 (6) TMI 974 - BOMBAY HIGH COURT] wherein the issue has been set aside to the file of the learned assessing officer to determine/adopt the rate of tax on refund in the light of relevant clauses of the DTAA . Therefore, we also set aside this issue to the file of the learned assessing officer to decide on the rate of tax on interest on income tax refund received by the assessee. TP Adjustment - segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately - HELD THAT:- We allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O erred in not refunding the tax deducted at source on such salaries in view of the fact that the deduction for such salaries paid to expatriate employees outside India was not allowed by him. 2. Interest amounting to INR 34,99,476 accrued/ received by the Indian PE from its HO overseas branches. 2.1 That on the facts and in the circumstances of the case and in law, the Hon ble DRP erred in confirming the addition, as proposed in the draft assessment order, for an amount o INR 34,99,476 being the interest accrued/ received by the Indian PE of the Appellant on funds lying with the HO/ other Overseas branches. 2.2 That on the facts and in the circumstances of the case and in law, the Hon ble DRP erred in not following the favourable decisions of the Hon ble Tribunal in the Appellant s o wn case for earlier years. 3. Disallowance under section 14A of the Act on account of exempt interest earned on Pass Through Certificates ( PTCs ) amounting to INR 2,25,21,366. 3.1 That on the facts and in the circumstances of the case and in law, the Hon ble DRP and Id. AO were unjustified in disallowing a sum of INR 2,25,21,366 under section 14A of the Act read with Rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the Appellant. 6.2 Under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the Appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject AY) in the case of Domestic Companies and consequential directions may kindly be issued in this regard. 7. Short grant of credit for TDS That on the facts and circumstances of the case and in law, the Id. AO erred in not granting credit of tax of INR 1,92,29,851 withheld by income-tax department on interest on income tax refund. 8. Erroneous computation of tax liability That on the facts and circumstances of the case and in law, the Id. AO has erred in determining tax liability of INR 282,93,37,371 (before credit of prepaid taxes) on the assessed income as against INR 276,00,20,917. 9. Transfer Pricing adjustment 9.1 That on facts and in law, the Hon ble DRP and Ld. AO/TPO erred in making an adjustment of INR 10,34,85,509 to the returned income of the Appellant in respect of the international transaction pertaining to receipt of counter guarantee commission from Associated Enterprises ( AEs ) ( impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee is a banking company incorporated in Japan and is a tax resident of Japan. The assessee is engaged in wholesale banking operations in India Under a license From the Reserve Bank of India and is covered by The Banking Regulation Act, 1949. It is earlier known as the Bank of Tokyo Mitsubishi UFJ Ltd. MUFG group is the holding company for the Japan, Mitsubishi UJF trust and banking Corporation (MUTB) and certain other companies from Japan. The group s primary activities are that of administration and management of banking and other financial services provided by its group companies. The assessee is carrying on mainly banking activities and limited to wholesale banking only. It is engaged in institutional banking, credit/landing and other facilities to the corporate. 4. It filed its return of income for the assessment year 2015 16 on 30/11/2015 declaring total income of ₹ 11,103,709,068/ including an amount of ₹ 6,757,743,503/ in schedule SI of return of income which is taxable at the rate of 10%/5% on gross basis. 5. During the course of assessment proceedings the learned assessing officer noted that assessee has entered into 13 different interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on external commercial borrowing by head office or other overseas branches amounting to ₹ 668,93,71,324/ . Accordingly total income of the assessee was computed at ₹ 11,683,361,699/ . The learned assessing officer computed the business income of Permanent establishment of assessee in India at ₹ 4,993,990,375 which is to be taxed at the rate of 40% plus applicable surcharge and education cess. Out of the interest income on external commercial borrowings, he computed the total income of ₹ 6,689,371,324, out of which a sum of ₹ 518,00,31,066/ is to be taxed at the rate of 10% as Per the provisions of article 11 of the India Japan DTAA and an amount of ₹ 1,509,340,258/ is to be taxed at the rate of 5% Under the provisions of Section 194LC of the income tax act. Accordingly draft assessment order was passed by the learned assessing officer on 24/12/2018. The assessee preferred an objection before the learned Dispute Resolution Panel. The learned DRP passed a direction u/s 144C (5) of the act on 25/6/2019. Based on those directions the learned assessing officer passed an assessment order u/s 143 (3) of The Income Tax Act 1961 on 29/8/2019 making f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s employees. Tax deduction u/s 192 of the income tax act was also carried out. Accordingly in computing the taxable income of the assessee s permanent establishment India for the impugned assessment year the assessee claimed deduction of ₹ 484,153,799/ in respect of salaries paid by the head office to the expatriates employees and taxes paid thereon but not debited in the books of PE in India . The claim of the assessee is as the sum paid represented expenditure incurred for the purpose of the business operation of the India of Indian branches of the assessee and therefore same are allowable as a deduction. The learned assessing officer recorded the facts as per paragraph number [5] of his order wherein he held that these employees worked for head office as well as for its branch offices in India. There was no exclusivity of work and it cannot be accepted that the services given by these employees were wholly and exclusively for the purpose of the branch office in India only. Under the circumstances he held that the part of the work which was done for the purpose of the permanent establishment s business was remunerated by the permanent establishment and head office paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Salaries paid to expatriates 9. The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank vs. JCIT (2005) 97 ITD 1 (ITAT [Kol.]). Further the ITAT followed the decision of the Bombay High Court in CIT vs. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of theses expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of section 44C of the Act. 10. This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identical facts, the issue was decided in favour of the Assessee. This order of the Bombay High Court has been affirmed by the Supreme Court by order dated 26 August 2008 in Commissioner of Income Tax v. M/s. Emirates Commercial Bank Ltd. which in turn referred to an order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the assessee being payment to self which cannot give rise to the income that is taxable in India as per the domestic laws of India. The assessee relied on the several judgments of the High Court and coordinate benches. Assessee also submitted that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench dated 25 January 2017 in assessee s own case for assessment year 2010 11 where the issue is squarely decided in favour of the assessee. The learned assessing officer held that head office and the permanent establishment of the assessee are treated as two different distinct entities for tax purposes and therefore interest income in question is income received by its permanent establishment from head office and other branches. The learned AO further stated that the order of the coordinate bench for assessment year 2000 11 and 2011 12 on this issue has not been accepted by the revenue and an appeal has been filed before the honourable Delhi High Court. Accordingly he rejected the contention of the assessee. 13. The learned authorised representative submitted that income earned from head office and overseas branches is not ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer to not to tax the sum of ₹ 34,99,476 which is interest accrued and received by the Indian permanent establishment from its head office and overseas branches. Accordingly the learned assessing officer is directed to reduce the income of the assessee by the above sum. Accordingly ground number [2] of the appeal is allowed. 16. Ground number [3] of the appeal is with respect to the disallowance u/s 14 A of the act on account of the exempt interest income earned on pass-through certificates amounting to ₹ 22,521,366/ claimed as exempt u/ 10 [35A] of the Act. The learned assessing officer noted that assessee has earned an income of ₹ 37,002,690/ Under that interest income on pass through certificates which is claimed as exempt u/s 10 (35A) of the act. The assessee company has not disallowed the proportionate expenditure incurred on the above income as per the provisions of Section 14 A of the income tax act. The assessee was asked to show cause as to why the disallowance of proportionate expenditure incurred by it not be calculated as per the provisions of Section 14 of the act. The assessee submitted that assessee is a banking company in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and imputed the disallowance u/s 14 A of the income tax act. The learned assessing officer considered the expenditure directly relating to the pass through certificates interest expenditure at Rs Nil , however proportionate disallowance of the indirect interest expenditure was made of ₹ 1 97,40,048/ . % of the average value of the investment was also considered at ₹ 2,781,318/ .Accordingly total disallowance was made of ₹ 22,521,366/ . 17. The learned authorised Representative raised multiple arguments with respect to the above disallowance as Under:- 1. The provisions of section 14A are not applicable in the instant case for the following reasons: a. Section 14A is not applicable in case of bank whenthe investments are held as stock-in-trade. b. Rule 8D(2)(ii) (iii) does not apply to stock-in-trade therefore, disallowance made by the AO deserves to be set aside. c. Section 14A does not apply as provisions of the DTAA are more beneficial to the assessee. d. Section 14A does not apply as income earned from securitization trust is taxable under section 115TA of the Act. e. Disallowance made under Rule 8D(2)(ii) is bad as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 14A,has held that mobilization of deposits and investing such funds in appropriate channels to earn income is the prime business activity of the assessee. Hence, the AO is also in agreement with the contention of the assessee that investment made in PTCs is in the course of carrying on its business consequently, it forms part of stock-in-trade of the assessee. 4. It has been held by Delhi Tribunalin case of Punjab National Banks vs. DCIT (ITA No. 1519/Del/2016) (Para 8 Page - 203 of Compilation)that the provisions of section 14A are not applicable in case of a bank if exempt income is earned from the investments which are held as stock in trade. The relevant portion of the order is extracted as under: 8. It is observed that decisions relied upon by Ld. Sr. DR has been passed prior to decision of Hon ble Supreme Court in the case of Maxopp Investment vs. CIT (supra). Further, Hon ble Supreme Court in the case of Maxopp Investment vs. CIT (supra), has rendered a clear finding in respect of banking institutions which is peculiar. Present assessee before us is also a Bank, where shares were held as stock- in-trade and therefore it becomes business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of Rule 8D(2)(ii) (iii) are not applicable and therefore, the disallowance made by the AO is bad in law. 9. In this regard, the assessee refers to the decision of Kolkata Tribunal in case of DCIT vs. Gulshan Investment Co. Ltd.(142 ITD 89) wherein the Tribunal held that the provisions Rule 8D(2)(ii) (iii) do not apply when securities are held as stock in trade and the only disallowance can be made is under Rule-8D(2)(i). The operative portion of the decision is reproduced as under(Page 246 of Compilation): 6. A plain look at the above rule shows that 8 D(2)(ii) and (iii) can only be applied in the situations in which shares are held as investments, and that this rule will not have any application when the shares are held as stock in trade. It is so for the elementary reason that the one of the variables on the basis of which disallowance under rules 8D(2)(ii) and (iii) is to be computed is the value of investments, income from which does not or shall not form part of total income , and, when there are no such investments, the rule cannot have any application. When no amount can be computed in the light of the formula given in rule 8 D(ii) and (iii), no disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of this ground. Section 14A does not apply as the provisions of India-Japan DTAA are more beneficial: 13. As mentioned above, the assessee, being a resident of Japan, is entitled to the benefits of India-Japan DTAA. Article 7(3) of the DTAA provides that in determining the profits of a permanent establishment, there shall be allowed as deductions of expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred. The Protocol dated 7 March 1989 further explains that the deduction in respect of executive and general administrative expenses will be allowed in accordance with domestic law of India but such deduction will not be less than what is allowable under the Act on the date of signature of the convention. For ready reference, the relevant extract of the Protocol is reproduced as under(Page - 312 of Compilation): 7. With reference to paragraph 3 of article 7 of the Convention, it is understood that in India the deductions in respect of the executive and general administrative expenses as referred to in the said paragraph shall be allowed in accordance with the domestic law of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Therefore, it is submitted that the provisions of section 14A cannot be invoked as the DTAA does not allow the disallowance of expenses based on provisions inserted after the signing of the DTAA. 17. It is also submitted that the provisions of section 14A although inserted w.r.e.f. 1 April 1962 however, insofar as the DTAA is concerned, it shall have no effect as the protocol in the DTAA specifically provide that the deduction for expenses is to be allowed in accordance with the provisions in the Income-tax Act, 1961 as on the signing of the DTAA. And, there has been no amendment to the provisions of Article 7(3) in DTAA after it was executed in 1989. Therefore, amendment in the Income-tax Act, 1961 will not automatically override the provisions of the DTAA unless specifically agreed upon by the parties. In this regard, reliance is placed on the Judgment of Delhi High Court in case of New Skies Satellite B.V. vs. DIT (382 ITR 114) wherein the High Court has held as under(Page 337 of Compilation): 41.This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides. 43. The Vienna Convention on the Law of Treaties, 1969 ( VCLT ) is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the VCLT apply to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. 44. We do not however rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87. The court held in that case that the liability of trustees to income-tax is co-extensive with that of the beneficiaries and cannot in any case be a larger or wider liability. If the assessment is made upon a trustee, his liability to pay tax must be determined in accordance with section 41 of the Income-tax Act. It was observed in that case that section 41 gives no option to the taxing department to treat the income received by the trustee on behalf of the beneficiary as his own income or to treat it as the income of the trustee on behalf of the beneficiary. It was further observed: If the assessment is upon a trustee, the tax has to be levied and recovered in the manner provided in section 41. The only option that the Legislature gives is the option embodied in sub-section (2) of section 41, and that option is that the department may assess the beneficiaries instead of the trustees, or having assessed the trustees it may proceed to recover the tax from the beneficiaries. But on principle the contention of the department cannot be accepted that, when a trustee is being assessed to tax, his burden which will ultimately fall upon the beneficiaries should be increased and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid provision is on the dividend and not on the distributed profits of the dividend paying company, no material difference to the applicability of Section 14A would arise. Sub-sections (4) and (5) of Section 115-O of the Act makes it very clear that the further benefit of such payments cannot be claimed either by the dividend paying company or by the recipient assessee. The provisions of Sections 194, 195, 196C and 199 of the Act, quoted above, would further fortify the fact that the dividend income under Section 115-O of the Act is a special category of income which has been treated differently by the Act making the same non- includible in the total income of the recipient assessee as tax thereon had already been paid by the dividend distributing company. The other species of dividend income which attracts levy of income tax at the hands of the recipient assessee has been treated differently and made liable to tax under the aforesaid provisions of the Act. In fact, if the argument is that tax paid by the dividend paying company under Section 115-O is to be understood to be on behalf of the recipient assessee, the provisions of Section 57 should enable the assessee to claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs Shreno Ltd. 409 ITR 401 (Guj) (Para 16 17) (Pages 458 459 of Compilation) 18. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as assessee has earned exempt income during the year, the disallowance u/s 14 A of the act is mandatory. 19. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case the assessee has earned and tax free income of interest of ₹ 37,002,619/ which is claimed is an exempt income u/s 10 [35A] of the Act . The assessee has not disallowed any sum u/s 14 A of the act. The learned assessing officer has computed the disallowance of ₹ 22,521,366/ . The learned AO did not disallow any interest expenditure income which is directly relating to the investment in the passthrough certificates. However he imputed the proposed disallowance of indirect interest expenditure of ₹ 197,40,048/ . He further disallowed 0.5% of the average value of investment as administrative expenditure. Thus the total disallowance was computed at ₹ 22,521,366/ . The assessee has raised the first issue that it is treated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 6,689,371,324 from external commercial borrowing loan given by the head office/overseas branches to various customers in India. The learned assessing officer has taxed this income at the rate of 10% applying the article 11 (2) of double Taxation Avoidance Agreement. In view of this we dismiss ground number [4] of the appeal to that extent. 21. The other limb of ground number (4) is with respect to the deduction u/s 40 4C. The learned assessing officer has held that since the interest on external commercial borrowing loans are taxed on gross basis, therefore there is no question of allowing any deduction from such income and accordingly did not consider the interest on external commercial borrowing loans for the purpose of computing deduction under that Section. The assessee is aggrieved with that. 22. The learned authorised representative submitted that the deduction u/s 44C is granted either at the rate of 5% of adjusted total income or amount of expenditure attributable to the business of assessee in India. He referred to the explanation to that Section where Adjusted Total Income is defined. He submitted that there are certain exclusions which are not require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded in the adjusted total income as same has not been computed in accordance with the provisions of the income tax act as business income but by applying the provisions of the Double Taxation Avoidance Agreement. He submitted that the ECB loans are given to the Indian parties and thus the interest arises as such in India and is liable to be brought to tax as per article 11 of the Double Taxation Avoidance Agreement. He further stated that the debt claim is not connected with the permanent establishment as the loan has been given by the head office or other overseas branches of the assessee and it does not have anything to do with the Indian permanent establishment of the assessee. He submitted that Section 44C of the act applies only when the income of the assessee is included under the provisions of Section 28 to Section 43A of the act. Therefore he submitted that assessee is not entitled to claim of deduction of 5% on the interest income on ECB loans. 24. We have carefully considered the rival contention and perused the order of the learned AO. We have perused the objections raised by the assessee before the learned dispute resolution panel. As per objection number 3.3 before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of the Domestic tax Laws or DTAA, whichever is more beneficial to assessee. But there is no mandate that assessee can opt for lower taxes as per DTAA and claim expenses as per Domestic tax laws. Therefore there cannot be any further expenditure claimed as deduction from that income. That will dilute the amount of tax payable on interest income in the source country as payable according to the Double Taxation Avoidance Agreement. There is no mandate in the DTAA to grant any such deduction from income taxed u/s 11 (2) of the Act. In view of this, we do not find any infirmity in the order of the learned assessing officer in not granting deduction u/s 44C of the act from the above income which is taxed under article 11 (2) of the DTAA on gross basis at the rate of 10%. As we hold that there is no need to go to Section 44C of the act in this case, reliance placed by the assessee on the several judicial precedents with respect to the definition of meaning of total income/ adjusted income is not relevant. In view of this ground number (4) of the act of the appeal is dismissed. 25. Ground number [5] of the appeal is against the taxation of interest received by the assessee u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as per article 24 (2) of the DTAA, the taxation of a permanent establishment shall not be less favourable than the other enterprises in the contracting State carrying on the same activities. Therefore according to the assessee the tax rate of 40% levied on the total income of the assessee in India amounts to discrimination. The learned assessing officer has tax the total income at the rate of 40%. On objection before the learned dispute resolution panel, the same was dismissed following the decision of the coordinate bench in assessee s own case for assessment year 2007 08 and 2008 there 09 dated 19/9/2014 reported in 49 taxmann.com 441. 30. The learned authorised representative though vehemently stated that the levy of tax at the rate of 40% on the total income of the assessee is not permissible as per article 24 (2) of the DTAA. However he submitted that this issue has been decided against the assessee in the earlier years and the issue is pending for adjudication before the honourable High Court. 31. The learned departmental representative vehemently supported the order of the learned assessing officer and stated that this issue is already decided against the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business in India. In such a case the customer of the associated enterprise approaches associated enterprise to arrange for a guarantee in India. Associated enterprises then issues counter guarantee in favour of the assessee for issuing a further guarantee in favour of a beneficiary in India. For the guarantee provided by the assessee to the beneficiaries, associated enterprise provides guarantee to assessee. This guarantee provided by associated enterprise to the assessee is termed as a counter guarantee. Further in this regard assessee performs very limited functions such as processing the request of guarantee from associated enterprise, issuance/delivery of the guarantee on stamp paper, seeking confirmation from the associated enterprise for cancellation/extension of the guarantee. Therefore the claim of the assessee is that assessee does not perform any function apart from issuing the guarantee in favour of the beneficiary. The claim of the assessee is also that that it does not undertake any separate evaluation of the beneficiary and all background and creditworthiness checks are performed by the associated enterprise only. It is further stated that in case a guarantee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction of the receipt of guarantee commission and benchmarking the same separately adopting CUP method. 37. Before us the learned authorised representative has also raised an issue that the transfer pricing officer in the order dated 31st of October 2018 has not disputed that the all international transactions carried out by the assessee are to be aggregated for the purpose of benchmarking under the transactional net margin method. In fact the learned transfer pricing officer has accepted the aggregation of the transaction for the purpose of benchmarking of international transactions; however, without giving any reason as to why the aggregation of the transaction is incorrect , he used the CUP method for benchmarking the impugned international transaction. Therefore the claim of the assessee is that once the aggregation of the transaction is accepted for the purpose of applying transactional net margin method, then, it is not open to the learned transfer pricing officer to delink one transaction and apply a different method. For this proposition he relied upon the decision of the honourable Delhi High Court in case of 389 ITR 469 in case of Magneti Marelli powertra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions in the transfer pricing report applied combined approach and has benchmarked under TNMM method. The case of the assessee is that the Transfer pricing analysis undertaken by applying TNMM method on combined approach should be accepted, as the margins of the assessee has been accepted and no adjustment has been made in the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id education cess on the income-tax levied on the total income chargeable under the Act (refer relevant extracts of the return of income filed by the Appellant for AY 2015-16 enclosed as Annexure B). Subsequently, the learned Assessing Officer also assessed the income of the Appellant at 40% (plus applicable surcharge and cess on income-tax) in the assessment order passed for AY 2015-16. Refer para 28 at page 54 of assessment order for AY 2015-16 passed by the learned Assessing Officer. Recently, the Jurisdictional Tribunal have taken a view that the Education cess and Secondary Higher Education cess is deductible as an expenditure while computing the income under the head Profits and Gains from Business or Profession . In view of the above, the Appellant raises an additional ground with respect to deduction of Education cess and Secondary Higher Education cess levied on income-tax for A.Y. 2015-16. The Appellant submits the additional ground raised by the Appellant is a legal issue and stems from the facts already on record. In this regard, the Appellant placing reliance on the following judicial precedents and humbly request the Tribunal to admit the additional ground of appeal: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the non jurisdictional High Court is binding on the tribunal of a different state. Similarly he relied upon 150 ITR 1, 210 ITR 580 and 167 TTJ 689. He further submitted that the liability to pay the education cess has also arising during assessment year 2015 16 as it is dependent on the liability of the income tax payable Under the act it accrues in the previous year relevant to assessment year 2015 16. He simply stated that merely because the liabilities quantified wherein the computation of total income is made does not make any impact so far as the timing of accrual of such liability. He relied on the decision of the honourable Supreme Court, albeit, in the wealth tax matter in 59 ITR 767 in Kesoram industries and Cotton Mills Ltd versus Commissioner of wealth tax. He also submitted a computation that how the education cess allowability amount is determined. On the question raised by the bench that how the above education cess is considered to be an expenditure only and exclusively incurred for the purposes of the business u/s 37 (1) of the act he submitted that this question is no longer res Integra in view of the decision of the honourable Bombay High Court in hundred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 91.] [Explanation 2.-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 any sum eligible for relief of tax under section 90A;] 17. Therefore, the question which arises for determination is whether the expression any rate or tax levied as it appears in Section 40(a)(ii) of the IT Act includes cess . The Appellant - Assessee contends that the expression does not include cess and therefore, the amounts paid towards cess are liable to be deducted in computing 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. v. Raval, 37 ITR 41 (Bom.), it is held that one safe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly not deductable in computing the income chargeable under the head profits and gains of business or profession . Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, education cess or any other cess , then, the legislature could have easily included reference to cess in clause (ii) of Section 40(a) of the IT Act. The fact that 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 Ta x 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess ought not to be read or included in the expression any rate or tax levied as appearing in Section 40(a)(ii) of the IT Act. 28. In the Income-tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of 'any Cess,rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression cess is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression Cess and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, cess and consequently, Cess whenever paid in relation to business, is allowable as deductable expenditure. 29. In Kanga and Palkhivala's The Law and Practice of Income Tax (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in computing the income chargeable under the head of profits and gains of business or profession . They are as follows :- (i) DCIT v. Peerless General Finance and Investment and Co. Ltd. (ITA No. 1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta; (ii) DCIT v. Graphite India Ltd. (ITA No. 472 and 474 Co. No. 64 and 66/Kol/2018 decided on 22nd November, 2019)by the ITAT, Calcutta; (iii) DCIT v. Bajaj Allianz General Insurance (ITA No. 1111 and 1112/PUN/2017 decided on 25th 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed deduction towards the amounts paid by it as cess . She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. v. Commissioner of Income-tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant - Assessee. 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the Commissioner (Appeals) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare's contention based upon the decision in Goetze (supra). 42. For all the aforesaid reasons, we hold that the substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the sole substantial question of law in Tax Appeal No. 18 of 2013 is also required to be answered in favour of the Appellant Assessee and against the Respondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification. 49. Therefore respectfully following the decision of the honourable Bombay High Court and honourable Rajasthan High Court, we set aside the issue back to the file of the learned assessing officer directing him to allow the education cess as deduction u/s 37 (1) of the act after verifying the computation of the same. Accordingly additional ground raised by the assessee is allowed with above direction. 50. In the result appeal of the assessee is partly allowed. Order pronounced in the open court on 16/10/2020. - - TaxT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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