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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SHRI O.P. KANT & MS. SUCHITRA KAMBLE
for assessment year 2011-12 and 2012-13 respectively. The issue in dispute involved in these appeals being identical, both were heard together and disposed off by way of this consolidated order for convenience and avoid repetition of facts.
Both parties agreed that issues being identical, the result of appeal for AY 2011-12 may be applied mutatis mutandis over the appeal for AY 2012-13. Accordingly, we have taken the appeal of the assessee for AY 2011-12 for adjudication. The ground raised by the assessee in appeal for AY 2011-12 are reproduced as under:
1. (a) The learned Commissioner of Income Tax (A) erred on facts and in law in confirming the transaction of corporate guarantee extended by the Appellant to the bankers of the Associate Enterprises (subsidiary companies) as international transaction without appreciating that it does not fall within the definition of International transactions" u/s 92B prior to amendment by Finance Act, 2012 and thereby erred in determining the Arm's Length Price (ALP) in respect of such transaction.
(b) The learned Commissioner of Income Tax erred in law and facts in confirming the arm's length price of corporate guarantees extended by the Appellant to the bankers of the Associate Enterprises and thereby erred in making upward transfer pricing adjustment of Rs 75,84,567/- u/s 92CA of the Income Tax Act, 1961 in respect of Corporate Guarantee Commission.
Without prejudice, the learned Commissioner of Income Tax (A) erred in upholding the arm's length price Corporate Guarantee Fee at 1% out of 2.02% proposed by the Assessing Officer on corporate guarantees provided by the Appellant on behalf of its A.E's without considering the following factors :
(a) that same would be applicable only in the case of commercial banks whose functions, assets and risks ('FAR1) profile are significantly different from the FAR of the Appellant and furthermore does not take into account the borrowing capacity or the benefit derived by the borrower; (b) that the comparable mean rate of @0.35% based upon actual bank/group company rate of guarantee commission which was submitted by the Appellant Company during assessment proceedings to cover the corporate guarantee to lender banks of overseas subsidiaries.”
3. The assessee also filed an application on 08/03/2021 for raising additional ground as under: “2. That on the basis of facts and circumstances of the case and as per law, the appellant be allowed deduction of Education Cess and Secondary & Higher Education Cess amounting toRs.32,22,510/- during the year under consideration as the same is not a disallowable expenditure as per section 40 (a) (ii) of the Act and which has been so held by Hon’ble Bombay High court in the case of Sesa Goa Ltd. V. JCIT [2020] 117 taxmann.com 96 as well as by various other Courts.”
4. Before us, the learned Counsel of assessee referred to the application for additional ground and submitted that additional ground raised is purely legal in nature and no investigation of fresh facts was required, hence same might be admitted in view of the decision in the case of NTPC Ltd Vs CIT 229 ITR 383 (SC). The Learned DR objected to raising of additional ground after a period of 4 years from filing of appeal. Having heard the parties on the issue of additional ground, same is admitted in view of the decision of the Hon’ble Supreme Court in the case of NTPC Ltd (supra), wherein additional ground can be raised at any stage of the appellate proceedings, if it arises from the facts available before the lower authorities and which has a bearing on the liability of the assessee.
Briefly facts of the case are that the assessee was engaged in manufacturing of precision forged Bevel Gears and Synchroniser rings used in automobile industry. For the year under consideration, the assessee filed return of income on 27/09/2011, declaring total income of Rs.33,25,06,115/-. The return filed by the assessee was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (in short the Act) were issued and complied with. During assessment proceeding, the Assessing Officer referred the matter of determination of arm’s length price of international transaction to the Ld Transfer Pricing Officer ( TPO). In the case, the ICICI Bank, Central Office Delhi has provided Bank Guarantee of Rs.124,29,00,000/-to ICICI bank, Hongkong and Allahabad Bank, Hongkong for repayment of loans given by the them to M/s Sona Autocomp, Germany (i.e. Associated Enterprises). Similarly, the State Bank of India, main branch, Delhi has issued a guarantee of Rs.7,50,00,000/- in favour of SBI , Chicago in respect of loan given by the latter to M/s Sona BLW, USA. The Indian branches of the banks have provided guarantee on the basis of bank guarantee furnished by the assessee to them. The Ld. TPO treated the transaction of providing bank guarantee as International transaction and proposed transfer pricing adjustment. The Learned TPO observed that the transaction of providing guarantee was covered under the definition of “international transaction” even before the Act was retrospectively amended by way of Finance Act, 2012 and after the amendment, there is no ambiguity that providing guarantee to the Associated Enterprise is international transaction which needs to be benchmarked. The Learned TPO noted that the assessee did not produce any transfer pricing documentation in support of charge of guarantee fee and also did not benchmark the transaction using any of the prescribed method, the initial onus of which was on the assessee. The reply furnished by the assessee is summarised as under: (i) in view of global financial crisis, for funding of cash crunch and another liabilities, the parent company ( i.e. the assessee) instead of infusing further funds in the subsidiary, which could have costed interest rate of nearly 14%, the assessee provided corporate guarantee at Nil interest, which has benefited the assessee by way of increased taxable profit.
(ii) by way of giving corporate guarantee, no benefit has accrued to subsidiaries in the form of low rate of interest as it is normal practice of Indian banks to take guarantee from directors/owners for any loan taken by the borrower, and thus transaction was in the nature of a pass through transaction (iii) giving corporate guarantee to banks for loans availed by overseas subsidiaries does not result in international transaction under section 92B of the Act, as it has no bearing on either profit, income, losses or assets of the assessee. In support of the contention, the assessee relied on the decision of the Tribunal Mumbai bench in the case of Glenmark pharmaceuticals Ltd (supra). (iv) Without prejudice that giving guarantee to bank, does not result in ‘International transaction’, the adjustment if any should not be more than 0.35% of the rate which is average of two CUP transactions of 0.1% and 06.% as follows :- (a) Agreement between one of AE with Indian Company where AE has charged corporate guarantee fee of 0.1% only for giving corporate guarantee to Indian Bank for loans assailed by Indian Company. (b) Advices of West LB AG Bank, where in Bank has charged guarantee fee of 0.6% for guarantee issued in favour of third parties at the request of overseas subsidy of the assessee.
6. The Learned TPO rejected the argument of the assessee of shareholder activity or commercial activity and held that if the assessee would have given guarantee to an unrelated party, business prudence would govern that the assessee would have charged an amount as fee/charges for providing such guarantee to the unrelated party, which would be comparable with the market rate of interest. The Learned TPO relied on the decision of Tribunal Mumbai bench in the case of M/s Everest Kento cylinder Ltd versus DCIT (supra) wherein it is held that guarantee is a cost or a charge of providing guarantee as there is an element of benefit of cost while providing such guarantee to the AE. Finally the Learned TPO concluded that the assessee has borne the risk associated with provision of corporate guarantee on behalf of its AE and consequently, the transaction involves an element of service to the AE, necessitating the charge of guarantee fee. The Learned TPO collected information under section 133(6) of the Act from various banks regarding the guarantee fee and proposed adjustment to transaction of guarantee fee at average rate of 2.02%, which was computed as under:
Name of the Bank Minimum% Minimum% Average rate(%) HDFC Bank Ltd. 0.15 1.8 0.98 ICICI Bank Ltd. 0.05 2.5 1.28 Bank of Baroda 2.76 3.36 3.06 State Bank of India 2.75 2.75 2.75 Arithmetic Mean 2.02
7. The Learned TPO rejected the without prejudice argument of the assessee for adopting rate of 0.35% as under:
“8.11 As far as the contention of non-comparability of bank guarantee with corporate guarantee is concerned, the discussion has already been made above. The assessee further submitted that on a without prejudice basis, the internal CUPs of the assessee should be considered and the guarantee fees should be calculated at the mean of internal CUPs. In this regards it is seen from the details submitted that the assessee has provided two internal comparable transactions. i. A loan transaction in which the Indian Tax Resident group company provided and guarantee on behalf of another Indian Tax Resident group company at the rate of 0.1%. ii. A loan transaction in which the assessee has given guarantee on behalf of the same AB to west LB Bank.
8.12 In respect of the first transact, it is seen that the guarantee was given on behalf of Indian Tax Resident entity while the international transactions relates to the provision of guarantee on behalf of foreign tax resident AE. Since the entity on behalf of which the guarantee is given is different, this transaction cannot be considred as internal CUP.
8.13 In respect of the other transaction, it is seen that the circumstances and the factors surrounding the grant of corporate guarantee by the ThyssenKrupp group and the circumstances and factors surrounding the grant of corporate guarantee by the asessee are not comparable, as the guarantee given by the asessee subsequent to the guarantee given by ThyssenKrupp group. Therefore, internal CUP is rejected as the comparability under CUP requires strict service characteristics similarity. Therefore, the comparable provided by the asessee are rejected and the external CUP proposed in the SCN are considered.”
8. The Learned TPO proposed adjustment of Rs.1,53,20,825/- applying the rate of 2.02% as under:
“9. The assessee was asked to submit the details i.r.o the opening guarantee amount, the provision and repayment of guarantee during the year. The calculation of guarantee fees is made as given below, on the basis of details submitted by the assessee.
Particulars Amount No. Rate Guarantee of fees days Opening 61000000 365 2.02% 12322000 Balance Guarantee 302550000 177 2.02% 2963664 given to ICICI Bank Guarantee 186780000 3 2.02% 31011 given to ICICI Bank Guarantee 75000000 1 2.02% 4151 given to SBI Bank Total 15320825
9. In the draft assessment order, the Assessing Officer proposed the transfer pricing adjustment. As the assessee did not opt filing objection before the Learned Dispute Resolution Panel ( DRP), the Assessing Officer passed impugned assessment order on the 08/03/2015 after including the addition for transfer pricing adjustment on account of guarantee fee. Aggrieved, the assessee filed appeal before the Ld. CIT(A). Before the Ld. CIT(A) the assessee contested that guarantee was given for the benefit of the assessee, since the AE would have been forced to provide finance by borrowing in India. It was further submitted that no cost was involved in providing the guarantee. The assessee reiterated that provision of guarantee is not an international transaction relying on the decision of Tribunal in the case of Bharti Airtel Ltd Vs ACIT 63 SOT 113. The Ld. CIT(A) distinguished the said decision observing as under:
12.9, The decision in the case of Bharti Airtel as even otherwise distinguishable on the facts that Hon'ble Income Tax Appellate Tribunal in Shat, case was dealing with corporate guarantee and not the bank guarantee as in the case of the appellant. In the case of corporate guarantee, the appellant provide a guarantee to the banker of the AE which is lending its money to promise the repayment of loan in case of a default by the borrowing Company. However, in the present case,, the banker of the appellant has provided a bank guarantee to the bank which is lending the money to AE. The extract of die guarantee is reproduced in the order of the Assessing Officer to show that bank had imposed various conditions on the appellant besides having a charge on the various assets winch significantly affect the credit rating of the appellant and also impair the assets of the appellant to a large extent. It has to maintain its net wealth at a certain level, it has constraints on disposal of assets, change in business, etc. It, therefore cannot be stated that grant of this guarantee did not have a bearing on the assets and conduct of the enterprise. This ground of the assessee, is therefore, rejected.
10. The Ld. CIT(A), however restricted the rate to 1% instead of 2.02% charged by the Ld. TPO observing as under:
“17. The onus of showing that the transaction is at arm’s length is cast on the appellant and it is his duty to prove the same by following the most appropriate method. Where he fails to do so, the burden is cast on the TPO to benchmark the same by the most appropriate method. The appropriate method, however, in the case of benchmarking the corporate guarantee, is to determine the benefit received by the AE in its credit rating. The ideal way is to determine the rate of interest, the banks would have charged for proving a loan to the AE with the guarantee and without the guarantee, provided by the assessee. This would clearly bring out the impact and the benefit passed on by the assessee to its AE. However, neither the TPO nor the assessee has been able to furnish the data to compute the same. They have just obtained figures of commission charged by the various banks for issuing guarantees. It should be noted that these figures are only the service charge# being charged for issuing the guarantee. These do not measure the affect on the creditworthiness of the guarantor or the benefit derived by the AE. The banks keep themselves fully secured by charge on the assets/margin money: and do not bear any risk of non-recovery. The ‘Bank Charges’ charged by them are only for the clerical services rendered in issuing the guarantee. They cannot, therefore, benchmark the actual price of a guarantee.
A guidance as to the rates to be charged in the case of a bank guarantee, as in the ease of the assessee, can be drawn from the decision of the Mumbai High Court in the case of CIT vs. Everest Kento Cylinders Ltd. 378 ITR 57, wherein the assessee had offered the commission of 0.5% in respect of the corporate guarantee provided by it to its AB at Dubai. The AO benchmarked the same at 3% after considering the commission being charged by the various banks. The addition was deleted by the Tribunal. While deciding the appeal of the revenue, the Court observed as under:
In the mailer of guarantee commission the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee, No doubt these are contracts of guarantee, however, when they are Commercial banks that issue hank guarantees which are treated the Mood of commerce being easily encashable in the emit of default, and if the hank guarantee had to he obtained from Commercial Banks, the higher commission could have been justified. In the present erne, it is assesses company that is issuing Corporate Guarantee. to the effect that if the subsidiary AE dues nut repay loan availed of it from ICICI, then in such wait, the assessee would make good the amount and repay the loan. The considerations which applied jar issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but (he comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issue by holding company for the benefit of its AE. a subsidiary company.
19. The Court has approved the fact that bank guarantee do entail a higher amount of commission as compared to the corporate guarantee issued by the companies as such, l it the present case, the bank of the assessee has provided a guarantee to the bankers of the AE at the request of the appellant. The bankers of the AE in turn have provided loans to the AE at a favorable rate of return. Considering the facts of the case and also the guidance provided by Hon’ble Court, the adjustment is restricted to 1% instead of 2.02% charged by the TPO.
Before us, the Learned Counsel of the assessee filed a paperbook and reiterated the submission made before the lower authorities .The learned Counsel referred to Explanation to section 92B of the Act, which was inserted by Finance Act, 2012 retrospectively with effect from 2002, which covered corporate guarantee within the ambit of international transaction. The Learned Counsel over placed reliance on the decision of the Hon’ble Supreme Court in the case of Vatika Township private limited (2014) 49 taxmann.com 249 (SC) and MM Aqua technologies Ltd Vs CIT 129 taxmann.com 145 wherein it is held that retrospective provision in the tax which is ‘for removal of doubt’ cannot be presumed to be retrospective, even where such language used, if it alters or changes law as it earlier stood. The Learned Counsel reiterated that guarantee was given for own benefit of the assessee and no cost was incurred. Without prejudice, it was submitted that even if adjustment has to be made, applying the ratio of Tribunal in the case of DLF Ltd in and 5941/del/2017, the arms’s length price will be determined on the basis of FAR analysis and employing CUP method. The Learned Counsel submitted that corporate guarantee was given in foreign denominated currency, comparable mean rate considering internal CUP based upon actual overseas bank/group company rate of guarantee commission of 0.35%, which was submitted by the assessee during assessment proceeding, should be considered.
On the contrary, the Learned DR relied on the order of the lower authorities and submitted that it would be appropriate to categorise the transaction under the phrase “provision of services” rather than under the phrase “any transaction having a bearing on profit, income, losses or assets of such enterprise. Without prejudice, he also submitted that transaction had bearing on profits, income or assets of the assessee as the transaction directly influence the quantum of the assets of the company owned at any given point of time. The Learned DR also refuted the claim of the assessee that no cost was incurred for providing guarantee. He relied on the decision of the Everest kento cylinder Ltd (supra) of the Tribunal Mumbai bench. Further, he relied on the decision of the Tribunal dated 10/09/2021 in the case of DLF Ltd in and 5941/del/2017, wherein the decision dated 10/12/2020 of the Hon’ble madras High Court in the case of Redington (India) Ltd reported in 430 ITR 298 has been followed.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The main contention of the assessee that Explanation to section 92B of the Act, which has been inserted by the Finance Act 2002 retrospectively with effect from 2002, should be considered as prospective in nature in view of the decision of the Hon’ble Supreme Court in the case of Vatika township private limited (supra). The relevant part of the Explanation is reproduced as under:
Explanation.—For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include— (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short- term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression "intangible property" shall include— a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (z) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (/) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.
As far as retrospectively of the Explanation to section 92B of the Act is concerned, the Tribunal in the case of DLF Ltd (supra) has held the transaction of corporate guarantee is an international transaction for AY 2012-13, but the matter has been referred to the AO/TPO for verification of fact whether the guarantee was in reality a corporate guarantee or only a letter of comfort. In the case of Redington (India)Ltd (supra) Hon’ble Madras High Court has considered the arguments of Ld. Counsel of the assessee to read the Explanation to section 92B as prospective in nature with reference to the decision of the Hon’ble Supreme Court in the case of Vatika township private limited (supra) (refer to para 70 of the Hon’ble High Court), however the Hon’ble High Court in para 72 onwards held this explanation to be retrospective in nature. The relevant finding of the Hon’ble High Court is reproduced as under:
72.A new Enactment or an Amendment meant to explain the earlier Act has to be considered retrospective. The explanation inserted in Section 92B by Finance Act 2012 with retrospective effect from 01/64.2002 commences with the sentence For the removal of doubts, it is hereby clarified that 73.An Amendment made with the object of removal of doubts and to clarify, undoubtedly has to be read to be retrospective and Courts are bound to give effect to such retrospective legislation.
74.The learned Senior Standing counsel for the Revenue referred to the decision in Co-operative Company Limited vs. Commissioner of Trade Tax in Civil No.2124 of 2007 dated 24.04.2007, wherein it was held that when an amendment is brought into force from a particular date, no http://www.judis.nic.in T.C.A.Nos.590 & 591 of 2019 retrospective operation thereof can be contemplated prior thereto. The explanation in Section 92B specifically has been given retrospective effect and it is clarificatory in nature and for the purpose of removal of doubts. This issue was considered by this Court in the case of Sudexo Food Solutions India Private Ltd. 75.The concept of Bank Guarantees and Corporate Guarantees was explained in the decision of the Hyderabad Tribunal in the case of Prolifics Corporation Limited. In the said base, the Revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of Section 92B does not enlarge the scope of the term international transaction to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an http://www.judis.nic.in T.C.A.Nos.590 & 591 of 2019 inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. 76.In the light of the above decisions, we hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guarantee and restore the order passed by the DRP.
No contrary decision of Hon’ble jurisdictional High Court or Hon’ble Supreme Court has been brought by the assessee before us. In such circumstances, respectfully following the decision of the Hon’ble Madras High Court (supra), we uphold the transaction of guarantee provided to the banks by the assessee for availing loans by the Associated Enterprises, is an international transaction liable to be benchmarked as per the provisions of the Act.
As far as issue of benchmarking is concerned, we find that Assessing Officer has applied the rate of 2.02% which has been restricted by the CIT(A) to 1% of the loans availed. However, we are of the opinion that, the transaction has to be benchmarked applying most appropriate method as per the provisions of the Act. The adjustment made by the Assessing Officer taking average rate of guarantee commission by the banks cannot be held as a comparable uncontrolled price. The Learned AO or the TPO has to compare the transaction of the assessee with actual transaction happened during relevant period in circumstances comparable to the assessee, as per the strict requirement of CUP method. In the circumstances, we feel it appropriate to restore the issue of benchmarking of the international transaction of guarantee fee/commission to the file of the Ld. AO/TPO for deciding afresh after providing adequate opportunity of being heard to the assessee. The ground of the appeal of the assessee, are accordingly allowed for statistical purposes.
As regard the additional ground of the assessee for allowing education cess as expenditure is considered, the learner Consul of the assessee has relied on the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd Vs JCIT (117 taxmann.com 96) and decision of the Hon’ble Rajasthan High Court in the case of Chambal fertilisers and chemicals Ltd versus CIT (ITA No. 52/2018 dated July 31, 2018). The assessee has also relied on few decisions of the Tribunal.
18. Before us the Learned DR vehemently objected for allowing education cess as expenditure. The arguments of the Learned DR, which have been filed in the form of written submission is are reproduced as under:
2. While giving its finding on this issue in the case of Sesa Goa Ltd. vs. JCIT, Hon'ble Bombay High Court ruled that even though cess may be collected as a part of income tax, that does not render cess as either a “rate or tax", as it is not included in section 40(a)(ii) of the Act. Hon'ble Court also observed that section 10(4) of the Income-tax Act, 1922 specifically referred to the word "cess", however, the same did not find any mention in the current Act. The fact that legislature has not done so means that it did not intend to prevent the deduction of amount paid by an Assessee towards "cess". Hon'ble Court also referred to CBDT Circular No. 91/58/66-ITJ(19) dated May 18, 1967, which stated that omission of the word "cess" from clause (ii) of section 40(a) of the Act after the opinion of the Select Committee, meant that only taxes paid are to be disallowed for the assessment year 1962-63 and onwards, and held that circular is binding on the income tax authorities and also that circular is quite consistent with the principles of interpretation of taxing statute. In the case of Chambal Fertilizers Hon'ble Rajasthan High Court relied upon the CBDT Circular referred (supra) and also held that cess is not a tax without providing any reasoning to the argument that Finance Act has levied additional surcharge terming it to be cess.
It has been stated that it would be pertinent to have a view on certain aspects which entail further deliberations on the issue of allowability of education cess. The first being greater analysis of what is the nature of education cess. Second would be whether it is an expenditure or is it a distribution of profits / application of income. Third whether the reliance placed on CBDT Circular dt.18.05.1967 is correct on this issue.
Education Cess was brought in for the first time by Finance Act, 2004. For the purpose of discussion, it would be sufficient to refer to Finance Act, 2004 and section 2(11) and (12) of Finance Act, 2020, wherein levy of Education cess, in its new label being "Flealth and Education Cess", is provided for. On going through the text of Section 2(11) & (12) of Finance Act, it is amply clear that cess has been levied as an additional surcharge for the purposes of the Union, so as to fulfil the commitment of the Centre to provide and finance quality health services and education. It has only been termed as a cess.
5. Hon'ble Supreme Court in the case of CIT vs. K. Srinivasan (83 ITR 346) elucidated the concept of surcharge and equated it with an additional tax. The Court observed that Article 270(1) of the Constitution of India ("the Constitution") provides that taxes levied and collected by the Union has to be distributed between the Union and the States in the manner provided in clause 2 of Article 270. The Court also observed that Article 271 of the Constitution provides that the Parliament, notwithstanding anything contained in Article 269 and 270, may at any time increase, inter alia, taxes referred to in such articles with a surcharge for the purposes of the Union and whole proceeds of it would form part of the Consolidated Fund of India, meaning thereby that the proceeds of surcharge are wholly assigned to the Union, which the Finance Acts also provides expressly. The Court thereafter referred to the dictionary meaning of the word "surcharge" to mean that "to charge too much or in addition" and also "additional tax". The Court, thereafter, held that income tax is to be charged in four different ways- basic charge, surcharge, special surcharge and additional surcharge. Therefore, even additional charges form part of income tax and surtax.
Flon'ble Bombay Fligh Court has not considered the language used in Finance Act. Further consideration is required on the argument that cess is an additional surcharge only and would not be allowed as a deduction. Keeping in mind the clear language used in Finance Act equating cess with an additional surcharge and the aforesaid decision of the Supreme Court in the K. Srinivasan (supra) which holds that surcharge is nothing but an additional tax, the contention raised that cess is nothing but a tax requires a deeper consideration.
In order to substantiate the distinction between expenditure incurred for the purpose of earning income and application of that income, reference has also been made to the decision of Hon'ble Supreme Court in the case of CIT vs. Travancore Sugars & Chemicals Ltd. (88 ITR 1). Hon'ble Apex Court was concerned with the issue whether payment to the Government under a contract for taking over another Company by the Assessee Company would be eligible for deduction or not. The Assessee before the Court had entered into a contract, inter alia, with a condition that the Government would be entitled to twenty percent of net profits of the Assessee Company for every year, subject to a maximum of Rs. 40,000. The Contract also stipulated the manner in which net profit was to be calculated. After laying down that the expenditure so incurred was revenue in nature, the Court went ahead to deal with the issue that when payment is, computed with reference to profits, whether the same would be a mere division of profits or is it an item of expenditure. The Court observed that the amount paid by reference to profits can either be that it is paid after the profits became divisible or distributable or that the amount is payable prior to such distribution or division, to be computed by a reference to notional or an apparent net profit. The Court ruled that in the former instance, it will certainly be a distribution of profits and not deductible as an expenditure incurred in running the business and in the later, after considering the facts of the case and nature of obligation under the instrument, it would be possible to contend that expenditure was incurred as a contribution to profit-earning apparatus or expended wholly and exclusively for the purposes of business. Thereafter, the Court ruled in favour of the Assessee holding that the Assessee is eligible for deduction of the payment so made. Classic example to the later part which the Court referred to would be payment of Remuneration to Directors, which is determined on the basis of Net Profits of the Company. However, in the present case, the question is whether cess would form part of first category or second category. In view of the decision discussed above, it is obvious that cess is an item falling in the first category and therefore not allowable as deduction.
Reference has also been made to order dated 06.12.2019 of Hon'ble Supreme Court in the case of Unicorn Industries vs. UOI & Others in Civil Appeal No. 9237/2019. This order is in respect to levy of education cess, higher education cess and National Calamity Contingent Duty (NCCD) in the context of exemption of Excise Duty. It has been stated that the ratio of the decision of Hon'ble Supreme Court is also applicable on the issue of admissibility of 'Education Cess' as expenditure and reference has been made to para-40 & 41 at P/36-38 of the order. In para-41 Hon'ble Supreme Court has observed that the notification (issued earlier on 09.09.2003) could not have contemplated the inclusion of education cess and secondary & higher education cess imposed by the Finance Act, 2004 & 2007 in the nature of duty of excise. The duty of NCCD, Education cess and Secondary & Higher Education cess are in the nature of additional excise duty. In para- 41 at P/38 Hon'ble Supreme Court has also observed that the circular of 2004 issued based on the interpretation of the provision made by one of the Custom Officers, is of no avail as such Circular has no force of Law and cannot be said to be binding on the Court. It has been stated that going by the same analogy, CBDT Circular dated May 18, 1967 could not have contemplated the admissibility as expenditure or otherwise of education cess and/or health & education cess which were introduced by Finance Act, 2004 & Finance Act, 2020 as additional surcharge and the same are in the nature of additional income tax. This is also in line with the decision of Hon'ble Supreme Court in the case of CIT vs. K. Srinivasan (83 ITR 346). Accordingly it has been stated that the reliance placed by Hon'ble Bombay High Court, with due respect to Hon'ble Court, on CBDT Circular dated May 18, 1967 is not correct while giving its finding on this issue in the case of Sesa Goa Ltd.
It is also stated that cess is payable by all categories of assessee's irrespective of head of income subjected to tax. If it is allowed as business expense, an anomalous situation would be created as to how the parity of salary income, income from house property, other source income, capital gains vis-a-vis business income can be established? Treatment of cess in the case of business income in a different way would stand to be discriminatory to other categories of assessees which can't obviously be intent or objective of the Law.
In view of the above submissions it has been urged that education cess so paid, is a payment in the nature of distribution of income, it is nothing but the State's right in the profits of the Assessee, akin to income tax. The question of levy of cess would arise only after profits are determined and are available for distribution, which the Supreme Court in the case of Travancore Sugars (supra) stated would not be eligible for deduction.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The learned Counsel of the assessee has fairly accepted that this ground was never agitated before the lower authorities at any stage of the proceedings and therefore requested that the matter maybe restored to the Assessing Officer for deciding in the light of the decision of the Hon’ble Bombay High Court in the case of sesa Goa Ltd (supra) and Hon’ble Rajasthan High Court in the case of Chambal Fertilizers and chemical Ltd (supra). The contention of the Leonard DR on the other hand is that there is difference in the cess, which is levied under the Income-tax Act and other enactment, in as much as, the cess levied under Income-tax Act partakes the character of Income-tax Act itself being a surcharge on the Income-tax and, therefore, it is not allowable as deduction, whereas the cess levied under other enactments is in respect of some services rendered by the Government and, therefore, it stands on the different footing and allowable as a deduction. He has further submitted that decision of the Hon’ble Supreme Court in the case of CIT Vs K Srinivasan (supra) and other decisions cited, have not been considered by the Hon’ble High Court in the case of Sesa Goa Ltd (supra) and Chambal fertilisers and chemicals Ltd (supra) and therefore he requested the bench to follow the decision of the Hon’ble Supreme Court.
Be that as it may, it is undisputed that assessee did not raise this issue it any stage before the lower authorities and therefore, we find force in the arguments of the Ld. Counsel of the assessee that this issue may be restored to the file of the Ld. Assessing Officer to take a view after giving opportunity to the assessee. The Ld. DR did not object to this request of the assessee. Accordingly, we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding in accordance with law. It is needless to mention that the assessee shall be provided adequate opportunity of being heard. This ground of the appeal is accordingly allowed for statistical purposes.
The grounds and additional ground raised in appeal for assessment year 2012-13 are being identical to grounds raised in assessment year 2011-12 and therefore same are adjudicated mutatis mutandis to the grounds raised in assessment year 2011- 12.
Both the appeals of the assessee are accordingly allowed partly for the statistical purposes.
Order pronounced in the open court on 18.11.2021.