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TMI Blog2021 (2) TMI 1319X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue regarding disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is bad in law. 2. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance U/S.14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses amounting to INR 8,17,52,359 be deleted and the said disallowance be restricted INR 1,46,90,230. Disallowance under Transfer pricing 3. On the facts and in the circumstances of the case and in law prevailing on the subject, the Appellant submits that the international transaction of providing corporate guarantee/counter guarantee to various banks and other corporate bodies for and on behalf of the associate enterprise is at arm's length and no adjustment was required to be made in respect thereof and the stand taken by the Assessing Officer/ Transfer Pricing Officer is incorrect and illegal and the Ld. Commissioner of Income-tax (Appeals) ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of international transaction of providing corporate guarantee / counter guarantee to the associate enterprise to the file of the Ld. Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) in this regard is bad in law. 9. On a without prejudice basis, the Appellant submit that guarantee fee charged by the banks from the Appellant has also been recovered from the Associated Enterprises. The Appellant has recovered these charges from the Associated Enterprise over and above the guarantee fee and same should be reduced from the Guarantee fees computed by the Ld. Assessing Officer." Further, the assessee has raised before us the following effective additional grounds of appeal: "1. Without prejudice to Ground No.1 and Ground No.2, on the facts and circumstances of the case, the Appellant prays that the disallowance under Sec. 14A of the Act should be restricted to the extent of exempt income earned during the year. 2. Whether on the facts and in the circumstances of the case and in law, the Educfation Cess and the Secondary and Higher Education Cess on the total income computed of the Appellant can be allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income for A.Y 2012-13 on 29.11.2012, declaring a total income of Rs. 418,28,93,299/-. Subsequently, the assessee filed a revised return of income on 28.03.2014, declaring a total income of Rs. 418,28,93,299/-. The return of income filed by the assessee was initially processed as such under Sec. 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. Observing that the assessee had during the year under consideration entered into international transactions with its Associate Enterprises (for short "AEs‟), a reference under Sec. 92CA(1) was made by the A.O to the DCIT (Transfer Pricing)-2(3)(2),Mumbai (for short "TPO‟) for benchmarking the said transactions. As per order passed under Sec. 92CA(3), dated 18.01.2016 the TPO made an upward transfer pricing adjustment of Rs. 6,19,73,996/- as regards the international transaction of providing corporate guarantee by the assessee to its Associated Enterprises (for short "AEs), viz. (i). Elsamex S.A., Spain; and (ii). ITNL International Pte Ltd., Singapore. 4. After receiving the order passed by the TPO under Sec. 92CA(3), dated 18.01.2016 the A.O passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame. Accordingly, the A.O worked out the disallowance u/s 14A r.w Rule 8D at Rs. 8,17,52,539/-, as under: Sr. No. Particulars Amount 1. U/rule 8D(2)(i) Nil 2. U/rule 8D(2)(ii) Nil 3. U/rule 8D(2)(iii) Rs. 8,17,52,359/- Total Rs. 8,17,52,359/- Observing that the assessee had suo motto offered a disallowance u/s 14A of Rs. 1,46,90,230/- in its revised return of income, the A.O restricted the additional disallowance to an amount of Rs. 6,70,62,129/- [Rs. 8,17,52,359/- (- ) Rs. 1,46,90,230/-]. Further, the A.O for computing the "book profit‟ of the assessee u/s 115JB of the Act added the aforesaid disallowance of Rs. 8,17,52,359/- that was worked out u/s 14A r.w Rule 8D. 6. Aggrieved, the assessee assailed the further disallowance that was worked out by the A.O u/s 14A r.w Rule 8D at Rs. 8,17,52,359/- before the CIT(A). It was observed by the CIT(A) that the issue pertaining to disallowance u/s 14A for the year in question was more or less the same as was there before him in the case of the assessee for the last two preceding years, viz. A.Y 2010-11 and A.Y 2011-12. It was noticed by the CIT(A) that a material difference in context of the issue in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 8D to an amount of Rs. 88,26,166/-, as against that suo motto offered by it in its return of income at Rs. 12,21,33,326/-. As noticed by us hereinabove, the A.O was of the view that in light of the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT (2006) 204 CTR 182 (SC), in the absence of a revised return of income, the seeking of reduction of the disallowance that was suo motto offered by the assessee in its return of income was not tenable. In fact, the A.O was of the view that in case the assessee wanted to raise the aforesaid claim, then, it was obligated to do so by filing a revised return of income. On the contrary, the CIT(A) relying on the judgement of the Hon'ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers and Shareholders (2012) 23 taxman.com 23 (Bom), had observed, that as there was no embargo on considering of the aforesaid claim of the assessee in the course of the appellate proceedings, thus, the contention of the assessee did merit acceptance. Accordingly, the CIT(A) restored the issue to the file of the A.O, with a direction to examine the assessee's claim for reduction of the disallowance u/s 14A r.w Rule 8D to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r executing the project and being a promoter had to invest as equity holder as per the terms of the concessionaire agreement; (ii) that the investments made by the assessee company to the extent of its net worth were out of its own funds, internal accruals or opening balances of internal accruals; (iii). that the borrowings were not utilised for equity investments of domestic companies; (iv). that the capital gains from the equity investments were taxable etc. In our considered view, the exhaustive contentions that were raised by the assessee to buttress its aforesaid claim for reduction of the disallowance under Sec. 14A were required to be verified and could not have been accepted by the CIT(A) on the very face of it. Insofar support drawn by the ld. A.R on the order passed by the Tribunal in the assessee's own case for the immediately preceding year i.e A.Y 2009-10, ITA No. 2393/Mum/2015 is concerned, the same being distinguishable on facts would not assist the case of the assessee in context of the issue under consideration. Accordingly, finding no infirmity in the restoring of the issue pertaining to the assessee's claim for reducing the disallowance under Sec. 14A r.w. Rule 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim 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), as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014, we are unable to persuade ourselves to accept the same. 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) and by the Hon'ble High Court of Delhi in PCIT Vs. IL & FS Development Company Ltd. (2017) 399 ITR 483 (Del). At the same time, we in light of the judgment of the Hon'ble Supreme Court in Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC) are unable to subscribe to the observation of the CIT(A), wherein he had inter alia directed the A.O to consider only those investments made in non-subsidiary companies which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w Rule 8D(2)(ii). Accordingly, the aforesaid observation/direction of the CIT(A) is expunged and the latters order is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ground of appeal No. 2 is partly allowed for statistical purposes. 11. We shall now deal with the appeal filed by the revenue wherein it has assailed the observations of the CIT(A) as regards the disallowance made by the A.O u/s 14A r.w Rule 8D. As is discernible from the ground of appeal no. 1, we find that the 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, Mumbai Vs. DCIT-2(3), Mumbai & Ors., dated 25.02.2016 r.w CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). However, 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 part of the CIT(A) to have relied upon the aforesaid judgments of the Hon'ble High Court of Bombay which are in context of the issue of disallowance of interest expenditure u/s 14A r.w Rule 8D(2)(ii) in the backdrop of availability of sufficient interest free funds with the assessee. Accordingly, as the aforesaid Ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at only those investments which had yielded exempt income during the year are to be considered for computing the "average value of investments‟ while working out the disallowance u/s 14A r.w Rule 8D(2)(iii), but then considering the judgment of the Hon'ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC) are not persuaded to further confine the same only to the extent of such investments which were made by the assessee in non-subsidiary companies. The Grounds of appeal No. 2 & 3 raised by the revenue are partly allowed in terms of our aforesaid observations. 13. The Grounds of appeal Nos. 4 & 5 raised by the revenue being general in nature are dismissed as not pressed. 14. We shall now deal with the grievance of the assessee that the A.O/TPO had erred in the failing to appreciate that the international transaction of providing corporate guarantee/counter guarantee by the assessee to various banks and other corporate bodies for and on behalf of its AEs, viz. (i). Elsamex S.A., Spain; and (ii). ITNL International Pte Ltd., Singapore was at arm's length and thus, no adjustment as regards the same was liable to be made. 15. As is discernible fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving a foreign guarantee by State Bank of India (SBI) varied between 1.305% - 2.025% per annum. Another indicator which as per the TPO could be considered as a yard stick for the rate of guarantee fee prescribed in the Safe Harbour Rules was 1.75% for a highly adequate creditor and 2% otherwise. Observing that the rates prescribed by SBI were more conservative and more representative, the A.O adopted the same for benchmarking the transaction of providing of corporate guarantee by the assessee to its AEs. At the same time, it was observed by the TPO that the Hon'ble High Court of Bombay in its order passed in the case of CIT Vs. Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom) had observed that though the bank guarantees were the contracts of guarantee but the same were required to be reasonably adjusted for the reason that the corporate guarantees were not as liquid as the banker'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 ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on behalf of its subsidiary AE cannot be compared with guarantees issued by commercial banks, had approved the corporate guarantee @0.5% that was charged by the assessee from its AE. It was, thus, the claim of the ld. A.R that as the assessee in the present case had charged guarantee fee @1% p.a of the value of the facility thus, said international transaction was at arm's length and no adjustment was called for in the hands of the assessee. 19. Per contra, the ld. D.R relied on the orders of the lower authorities. 20. We have deliberated at length on the issue under consideration in the backdrop of the contentions advanced by the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also considered the judicial pronouncements pressed into service by them in order to drive home their respective 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations. 21. We shall now deal with the additional ground of appeal raised by the assessee wherein it had claimed that the 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 of the Act. 22. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also the judicial pronouncements relied upon by them in context of the aforesaid additional ground of appeal. Insofar the claim of the Ld. A.R that unlike "rates" and "taxes" the amount paid by an assessee towards "Education Cess" or any "other cess" viz. the Secondary and Higher Education Cess is not a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961, we find that the said issue is squarely covered by the recent order 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). 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 Educat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any 9 TXA17&18-13 dt.28.02.2020 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the income chargeable under the head "profits and gains of business or profession". There is no reference to any "cess". Obviously therefore, there is no scope to accept Ms. Linhares's contention that "cess" being in the nature of a "Tax" is equally 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 Tax Bill, 1961, as introduced in the Parliament, had Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression "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 allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed and it was held that the amounts paid by the Assessee towards the 'education cess' were liable for deduction in computing the income chargeable under the head of "profits and gains of business or profession". They are as follows :- (i) DCIT Vs 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 Vs 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 Vs 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 judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in Unicorn Industries ( supra ) can be of no assistance to the Respondent - Revenue in the present matters. 37. Ms. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant - Assessee, in its original return, had never claimed 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. Vs 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 Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, 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. 43. Thus, we answer all the three substantial questions of law framed in Tax Appeal No.17 of 2013 in favour of the Appellant - Assessee and against the Respondent -Revenue. Similarly, we answer the sole substantial question of law framed in Tax Appeal No.18 of 2013, in favour of the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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