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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of the Assessing Officer, National e-Assessment Centre, Delhi dated 29.03.2021 passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] for the assessment year 2016-17 on the following amended grounds :-
“That on the facts and in the circumstances of the case and in law and based on the directions of the DRP: 1. The Ld. AO erred in law and on facts, in assessing the total income at INR 14,34,58,717/-as against returned income of INR 10,60,92,550/-
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Grounds of appeal relating_to transfer pricing adjustment of INR 3,73,66,167
2. The Ld. AO and Ld. Transfer Pricing Officer ("TPO") erred in law and on facts, in making an upward adjustment of INR 3,73,66,167 to the total income of the Appellant in relation to the international transactions of provision of software development services ("IT Services"), and provision of Support services in relation to configuration of clinical trial study ("ITeS") by the Appellant to its Associated Enterprise ("AE"), by re-determining the Arm's Length Price ("ALP").
3. IT service segment 3.1 The Ld. AO and Ld. TPO erred in law and on facts, in rejecting the scientific benchmarking analysis in relation to international transaction of IT services undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("the Rules"), and erroneously rejecting 10 (ten) out of 16 (sixteen) comparable companies selected by the Appellant. 3.1.1 The Appellant submits that following companies ought to be accepted as comparable companies to the IT Service segment of the Assessee: · Sasken Communication Technologies Limited (Segmental) · Accel Frontline Ltd (Segmental) · Akshay Software Technologies Limited · R Systems International Limited (Segmental) · Sagar Soft India Limited · InfoMile Technologies Ltd · Mudunuru Limited · Maveric Systems Limited · Kellton Tech Solutions Ltd · SQS India BFSI Limited (formerly Thinksoft Global Services Ltd)”
3.2 The Ld. AO and Ld. TPO erred in law and on facts, in selecting additional 7 (seven) alleged comparable companies in relation to international transaction of IT services by IT(TP)A No.227/Bang/2021 Page 3 of 23 conducting fresh benchmarking analysis without taking cognizance of Rule 10B(2) and 10B(3) of the Rules and erroneously altering/modifying existing filters, and/or by applying additional filters.
3.2.1 The Appellant submits that the following companies cannot be considered as comparable companies to the IT Service segment of the Assessee:
· Inteq Software Private Limited · Nihilent Limited · Persistent Systems Limited · Aspire Systems (India) Private Limited · Infosys Limited · Thirdware Solution Limited · Cybage Software Private Limited 4. ITeS segment
4.1 The Ld. AO and Ld. TPO erred in law and on facts, in rejecting the scientific benchmarking analysis in relation to international transaction of ITeS undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and erroneously rejecting 12 (twelve) out of 15 (fifteen) comparable companies selected by the Appellant.
4.1.1 The Appellant submits that following companies ought to be accepted as comparable companies to the ITeS segment of the Assessee:
· Allsec Technologies Limited · Cosmic Global Limited · Informed Technologies India Limited · Jindal Intellicom Limited · R Systems International Limited (Segmental) · Sundaram Business Services Limited · Crystal Hues Limited · Datamatics Financial Services Ltd · Suprawin Technologies Limited · ACE Software Exports Ltd
IT(TP)A No.227/Bang/2021 Page 4 of 23
· Hartron Communications Limited (Segmental) · Ultramarine & Pigments Ltd (Segmental)
4.2 The Ld. AO and Ld. TPO erred in law and on facts, in selecting additional 1 (one) alleged comparable company in relation to international transaction of ITeS by conducting fresh benchmarking analysis without taking cognizance of Rule 10B(2) and 10B(3) of the Rules and erroneously altering/modifying existing filters, and/or by applying additional filters.
4.2.1 The Appellant submits that 'SPI Technologies India Private Limited' cannot be considered as comparable companies to the ITeS segment of the Assessee.
5. The Ld. AO, Ld. TPO and Ld. DRP erred in law and on facts, in completely disregarding Appellant's submission of applying "upper turnover filter" as held by the Hon'ble Bangalore ITAT in Appellant's own case for Assessment Years 2011-12 and 2013-14.
6. The Ld. AO and Ld. TPO erred in law and on facts, in rejecting certain additional comparable companies proposed by the Appellant during the course of transfer pricing assessment which are ought to be considered in the final set of comparable companies in relation to international transaction of provision of IT services and ITeS, namely:
IT Services: · Agilisys IT Services India Private Limited · Batchmaster Software Private Limited · DCIS Dot Corn Solutions India Private Limited · Isummation Technologies Private Limited
ITeS: · Ace BPO Services Private Limited · Crystal Voxx Limited · Microgenetic Systems Limited
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7. The Ld. AO and Ld. TPO erred in law and on facts, in not complying with Rule 10B(5) of the Rules relating to use of multiple year data while undertaking fresh benchmarking analysis.
8. The Ld. AO and Ld. TPO erred in law and on facts, by gathering information u/s 133(6) of the Act, which were not available to the Appellant at the time of preparation of TP Documentation. 9. The Ld. AO and Ld. TPO erred in law and on facts, in disregarding the Appellant's submission in relation to erroneous computation of operating margin (operating profit to operating cost) of the comparable companies by the Ld. TPO including erroneously treating provision for doubtful debts as non-operating expense. 10. The Ld. AO and Ld. TPO erred in law and on facts, in not allowing market risk and working capital adjustment thereby disregarding the difference in risk profile of the Appellant and alleged comparable companies. Grounds of appeal
relating to corporate tax adjustment
11. Non-grant of deduction for education cess and secondary & higher education cess
11.1 The Ld. AO and Ld. DRP, while assessing the total income of the Appellant for the year under consideration, have erred in not allowing a deduction for education cess and secondary & higher education cess (collectively known as 'education cess') for the year under consideration.
11.2 On the facts and circumstances of the case and in law, the Ld. AO and Ld. DRP ought to have allowed a deduction of education cess for the year under consideration, though not claimed as a deduction by the Appellant while filing its return of income.
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11.3 The Ld. AO and Ld. DRP failed to appreciate that education cess is not a tax and does not form part of tax within the purview of section 40(a)(ii) of the Act.
11.4 The Ld. AO and Ld. DRP erred in not relying on the judicial rulings wherein, it was held that education cess is an allowable expense. 12. Levy of consequential interest under section 234B of the Act 12.1 The Ld. AO erred in levying interest under section 234B of the Act which is consequential to the grounds of appeal in above paras;
The Appellant submits that each one of our above grounds is without prejudice to the other.
The Appellant craves leave to add, modify, amend, alter or delete, any or all of the above grounds of appeal during the course of hearing and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
The assessee, Cenduit India is a subsidiary of Cenduit LLC. USA which is a specialized Interactive Response Technology (IRT) solutions provider. One of the IRT enable service offered by Cenduit LLC USA is preparation and management of clinical studies, based on the study- specific requirements of its customers. The assessee undertakes two types of activities namely; (a) providing Support Services to Cenduit LLC in configuring the clinical trial study based on the clients requirement: and (b) providing Software Development Services to Cenduit LLC on a contract basis.
IT(TP)A No.227/Bang/2021 Page 7 of 23 Provision of Support Services in relation to configuration of clinical trial study:
3. The Project Managers of Cenduit LLC, meet the customers and capture their requirements in the Users Requirement Specifications (URS). The requirements are tonically in terms of number of countries where the study would be conducted, identified hospitals / clinical trial site, patient dosages (which includes criteria such as ratio of placebo to actual drug. timing and quantum of dosage), required patient composition necessary for the trial, etc. Based on the URS. Cenduit LLC provides the requirements of the clinical study to the assessee.
The assessee works on the IRT to configure it to capture the client's requirements pertaining to manner of conducting the study. The IRT is a web-based software / platform which is owned by and hosted in Cenduit LLC's server outside India. Cenduit LLC does not provide access to the source code of the IRT to Cenduit India and accordingly the configuration does not result in development / creation of a new software / technology. In configuring the study, the assessee shall ensure that drugs are not mi- dosed, mis-randomised and balancing i.e. blinding) is not compromised.
The assessee configures the study under the broad supervision and instruction of Cenduit LLC. On completion of configuration of the study, Assessee sends intimation to Cenduit LLC or to the clients on behalf of Cenduit LLC. The clients undertake User Acceptance Test (UAT), post which the study is uploaded in the website of Cenduit LLC to go live.
It is submitted that the assessee is not engaged in performing any marketing related functions. The major teams of assessee comprising of around 2961 people as on 31st March 2016 involved in providing support
IT(TP)A No.227/Bang/2021 Page 8 of 23 services to Cenduit LLC in configuring the clinical trial study and Software Development serves are as follows:
Technical Operations — This team is responsible for configuration of the IRT software and creation of new study modules based on requirements of clients / Cenduit LLC Validation — This team validates the study modules developed by the Technical Operations team to ensure that the modules are in line with the requirements captured in URS. Quality Control — This team is responsible for ensuring. that the study is in compliance with the various internal guidelines and guidelines prescribed by the regulatory authorities. Product Support — This team helps maintenance of the study. Data Control — This team validates the content and accuracy of the data. Software Development Services: The Software Development of Cenduit India provides Software Development Services to Cenduit LLC in relation updation / development of IRT Software.
As per the Transfer Pricing (TP) document, the assessee has entered into the following International Transactions to its Associated Enterprises (AEs):
Particulars Amt (Paid) Amt (Recd) Method Fixed Assets 19,65.937 TNMM 50,67,98,222 TNMM Provision of Support Services in relation to configuration of clinical trial study 8,79,51,560 TNMM Provision of Software Development Services Recovery of expenses 3,32,97,976 Other 95,28,094 Other Reimbursement of expenses to AE
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TNMM Outstanding Trade and Other receivables 94,55,542 TNMM Outstanding Trade and Other payables 2,09,49,573 69,57,26,588 71,66,76,161 Total
The financials of the assessee in the TP study are as under:-
23,63,19,200 4,83,78,757 28,46,97,9571 Employee Benefit Expenses
Support services Software Total as per As per Audited in relation to Development Transfer Pricing Financial Particulars configuration Services Study Report Statements clinical trial study Operating Revenue 5,067,98,222 8,79,51,560 59,47,49,782 59,47,49,782 Revenue from operations 74,05,723 Other income 62,23,701 10,80,083 73,03,784 Foreign exchange gain 51,30,21,923 8,90,31,643 60,20,53,566 60,21,55,505 Total Operating Revenue (A) Operating Expenses 23,63,19,200 4,83,78,757 28,46,97,957 28,46,97,957 Employee Benefit Expenses 20,31,57,036 2,81,00,861 23,12.57,897 21,30,56,790 Other operating Expenses Depreciation 195,20,916 Finance Cost 553.241 43,94,76,236 7,64,79,618 51,59,55,854 51,78,28,904 Total Operating Expenses (B) 7,35,45,687 1,25,52,025 8,60,97,712 8,43,26,601 Operating Profit (C = A-B) 16.41% Operating 16.73% main (CIB) Reconciliation Total Operating Expenses as per the TPSR (X) 51,59,55,854 Total Operating Expenses as per the Audited Financials (Y) 51,78,28,904
IT(TP)A No.227/Bang/2021 Page 10 of 23 Difference (X-Y) -18,73,050 Add: Finance Cost 5,53,241 Add: Loss on sale of Fixed Assets 5,45,209 Add: Corporate Social Responsibility 9,15,000 Net difference 1,40,400
After examination of the TP study of the assessee and considering the objections of the assessee, the TPO arrived at the final set of comparables as follows:-
IT Services / SWD Segment
PLI Sr. Name of company (Weighted Average) No. Kals Information Systems Pvt Ltd 8.60% 1. 10.87% E-Zest Solutions Limited 2. 14.50% Rheal Software Pvt Ltd 3. 14.74% Sybrant Technologies Private Limited 4. 15.06% Harbinger Systems Pvt. Limited 5. 18.50% CG-VAK Software & Exports Ltd 6. R S Software (India) Ltd 20.87% 7. 24.83% Larsen & Toubro Infotech Ltd 8. 26.36% Nihilent Ltd 9. 28.20% Inteq Software Pvt Ltd 10. 30.89% Persistent Systems Ltd 11. 32.42% Infobeans Technologies Ltd 12. 36.90% Thirdware Solutions Ltd 13. Infosys Ltd 38.61% 14. 39.28% Aspire Systems (India) Pvt Ltd 15. 66.45% Cybage Software Pvt Ltd 16. 35 Percentile 18.50% Median 25.60% 65 Percentile 30.89%
ITeS Segment
PLI Sr. Name of company (Weighted Average) No. 10.26% Suprawin Technologies Limited 1. 15.33% One Touch Solutions (India) Pvt Ltd 2. 20.44% Tech Mahindra Business Services Ltd. 3. 26.44% Infosys BPM Ltd 4.
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37.77% SPI Technologies India Pvt Ltd 5. 56.44% Eclerx Services Ltd. 6. 20.44% 35 Percentile 23.44% Median 26.44% 65 Percentile
Pursuant to the directions of the DRP, while there was no variation in the ITeS segment, the TPO revised the margin computation of the comparable companies in the IT Services as follows:-
PLI Sr. Name of company (Weighted Average) No. Kals Information Systems Pvt Ltd 8.31% 1. E-Zest Solutions Limited 10.87% 2. 14.50% Rheal Software Pvt Ltd 3. 14.74% Sybrant Technologies Private Limited 4. 15.06% Harbinger Systems Pvt. Limited 5. 16.71% CG-VAK Software & Exports Ltd 6. 20.87% R S Software (India) Ltd 7. 26.36% Nihilent Ltd 8. 27.12% Larsen & Toubro Infotech Ltd 9. 28.20% Inteq Software Pvt Ltd 10. 30.89% Persistent Systems Ltd 11. 32.42% Infobeans Technologies Ltd 12. 32.70% Aspire Systems (India) Pvt Ltd 13. 36.90% Thirdware Solutions Ltd 14. 38.61% Infosys Ltd 15. 65.84% Cybage Software Pvt Ltd 16. 35 Percentile 16.71% Median 26.74% 65 Percentile 30.89%
Against this, the assessee is in appeal before us. Now the contention of the ld. AR before us by way of above grounds is that the turnover filter is to be applied ranging from 1 to 200 crores in respect of above comparables in ITS as well as ITeS segments. Being so, the IT(TP)A No.227/Bang/2021 Page 12 of 23 companies with 1 to 200 crores turnover has to be included as comparables and other companies excluded.
We have heard both the parties and perused the material on record. Admittedly, this issue came up for consideration before this Tribunal in assessee’s own case in IT(TP)A No.59/Bang/2016 order dated 24.4.2019 wherein it was held as under:-
“10. We shall first take up for consideration Gr.No.2(b) raised by the Assessee in its cross objection, viz., the objection that the AO applied lower turnover filter of Rs.1 Crore and rejected companies with turnover of less than Rs.1 crore from the list of comparable companies and by the same logic he ought to have excluded companies with high turnover from the list of comparable companies (companies having turnover of Rs.200 crores and above). If that ground is adjudicated two out of the 4 companies which remain after the order of the DRP, viz., Persistent systems Ltd. and Sasken Communications Technologies Ltd., will go out of comparability because their turnover for the relevant previous year is Rs.610.13 Crores and 394.20 Crores respectively. So also the following four companies which are part of the set of 13 comparable companies will go out of comparable companies viz., Infosys Ltd. (Turnover of Rs.25,385 Crores), Larsen & Toubro Infotech Ltd. (turnover of Rs.2331.81 Crores, Mindtree Ltd. (turnover of Rs.878.30 Crores and Tata Elxsi Ltd. (turnover of Rs.358.20 Crores). If the aforesaid six companies are excluded by applying turnover filter, then the profit margins of the remaining companies, even assuming those companies are regarded as comparable will be within the range of profit margin permissible in law and therefore the price charged by the Assessee in the international transaction would have to be regarded as at ALP. Therefore there would be no necessity to decide the other grounds of IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 11 of 25 appeal in the Revenue’s appeal regarding transfer pricing as well as the other grounds raised in the Cross-Objection.”
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In view of the above order of the Tribunal and taking a consistent view, we direct the AO/TPO to consider the comparables in both ITS and ITeS segments having turnover of 1-200 crores and decide the issue accordingly.
Ground No.11 is regarding non-grant of deduction for education cess and secondary & higher education cess.
After hearing both the parties, we are of the opinion that this issue came for consideration before the Bangalore Bench in the case of Wipro Ltd., 122 taxmann.com 268 (Bangalore - Trib.) wherein it was held as under:-
“25.3 We heard the parties on this issue and perused the records. Besides the decision of Rajasthan High Court, referred supra, we notice that the Hon'ble Bombay High Court has also held in the case of Sesa Goa Ltd. v. Jt. CIT [2020] 117 taxmann.com 96 (Bom.) that the education cess is allowable as deduction. For the sake of convenience, we extract below the decision rendered by Hon'ble Bombay High Court in the case of Sesa Goa Ltd. (supra):— 15. The substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the only substantial question of law in Tax Appeal No. 18 of 2013 is one and the same namely, 'whether Education Cess and Higher and Secondary Education Cess, collectively referred to as "cess" is allowable as a deduction in the year of its payment ?' 16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", - (a) in the case of any assessee - (ia) ………………………
IT(TP)A No.227/Bang/2021 Page 14 of 23 (ib) ………………………….. (ic) …………………………. (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. [Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for 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 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 and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and IT(TP)A No.227/Bang/2021 Page 15 of 23 precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it.
Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT v. Motors & General Stores 66 ITR 692 (SC)].
In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT v. Radhe Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear v. State of Haryana 188 ITR 402(SC)].
There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber v. CIT 233 ITR 207].
Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that "any rate or tax levied" on "profits and gains of business or profession" shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". There is no reference to any "cess". 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
IT(TP)A No.227/Bang/2021 Page 16 of 23 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.
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".
The legislative history bears out that the Income-tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows : "(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains"
However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word "cess" from the aforesaid clause from the Income- tax Bill, 1961. The effect of the omission of the word "cess" is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head "profits and gains of business or profession". Since the deletion of expression "cess" from the Income-tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.
In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No. 91/58/66- ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :-
IT(TP)A No.227/Bang/2021 Page 17 of 23 "Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 - Clarification regarding.- "Recently a case has come to the notice of the Board where the Income-tax Officer has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.’ 2. The view of the Income-tax Officer is not correct. Clause 40(a)(ii) of the Income-tax Bill, 1961 as introduced in the Parliament stood as under:- "(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains". When the matter came up before the Select Committee, it was decided to omit the word 'cess' from the clause. The effect of the omission of the word 'cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards.
The Board desire that the changed position may please be brought to the notice of all the Income-tax Officers so that further litigation on this account may be avoided.[Board's F. No. 91/58/66-ITJ(19), dated 18-5- 1967.] 27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of 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.
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 IT(TP)A No.227/Bang/2021 Page 18 of 23 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.
In Kanga and Palkhivala's "The Law and Practice of Income Tax" (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT v. Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.
The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income-tax Appeal No. 52/2018 decided on 31st July, 2018 (Chambal Fertilisers and Chemicals Ltd. v. CIT Range-2, Kota ), by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held
IT(TP)A No.227/Bang/2021 Page 19 of 23 that the ITAT erred in holding that the "education cess" is a disallowable expenditure under section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee.
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 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.
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.
The ITAT, in the impugned judgment and order, has reasoned that since "cess" is collected as a part of the income tax and fringe benefit tax, therefore, such "cess" is to be construed as "tax". According to us, there is no scope for such implications, when construing a taxing statute. Even, though, "cess" may be collected as a part of income
IT(TP)A No.227/Bang/2021 Page 20 of 23 tax, that does not render such "cess", either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really not determinative in such matters.
Ms. Linhares, has relied upon M/s Unicorn Industries v. Union of India and others, 2019 SCC Online SC 1567 in support of her contention that "cess" is nothing but "tax" and therefore, there is no question of deduction of amounts paid towards "cess" when it comes to computation of income chargeable under the head profits or gains of any business or profession.
The issue involved in Unicorn Industries (supra) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the 'education cess, higher education cess and National Calamity Contingent Duty (NCCD)' on it could be construed as "duty of excise" which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression "duty of excise" and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was upheld by the Apex Court in Unicorn Industries (supra).
The aforesaid means that the Supreme Court refused to regard the levy of education cess, higher education cess and NCCD as "duty of excise" when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant - Assessee towards the "cess" can never be regarded as the amounts paid towards the "tax" so as to attract provisions of Section 40(a)(ii) of the IT Act. All that we may observe is that the issue involved in Unicorn Industries (supra) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries (supra) can be of no assistance to the Respondent - Revenue in the present matters.
IT(TP)A No.227/Bang/2021 Page 21 of 23
Mr. 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. 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.
Although, it is true that the Appellant - Assessee did not claim any deduction in respect of amounts paid by it towards "cess" in their original return of income nor did the Appellant - Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant - Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant - Assessee, both before the Commissioner (Appeals) as well as the ITAT. 39. In CIT v. Pruthvi Brokers & Shareholders (P.) Ltd. 349 ITR 336, one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze (supra) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd. v. CIT (199 ITR 351 to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which IT(TP)A No.227/Bang/2021 Page 22 of 23 may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law.
The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze (supra), the Hon'ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order.
Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant - Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if 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).
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." Respectfully following the decision rendered by Hon'ble Rajasthan High Court and the Bombay High Court (referred
IT(TP)A No.227/Bang/2021 Page 23 of 23 above), we hold that the education cess is allowable as deduction. We direct the AO accordingly.” 16. In view of the above order of the Tribunal, we are inclined to allow this ground.
No other grounds were pressed before us, accordingly they are dismissed.
In the result, the assessee’s appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 12th day of January, 2022.