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Income Tax Appellate Tribunal, “J” Bench, Mumbai
Before: Shri Pramod Kumar & Shri Ravish Sood
O R D E R
PER RAVISH SOOD, JM
The captioned appeal filed by the assessee is directed against the order passed by the A.O under Sec. 143(3) r.w.s 144C (13) of the Income Tax Act, 1961(for short ‗Act‘), dated 27.01.2017. The assessee has assailed the impugned order on the following grounds of appeal before us:
―Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income-tax- 12(3)(2), Mumbai ['Learned AO'], under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 ('Act') ('Assessment order'), in pursuance of the directions issued by Dispute Resolution Panel - 3 ('Hon'ble DRP'), Mumbai, on the following grounds: On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon'ble DRP has:
2 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
General Ground erred in assessing the total income of the Appellant at Rs 436,47,34,833 against Rs 22,5 1,21,420 as computed by the Appellant in its return of income; 2. erred in making a transfer pricing adjustment of Rs 413,96,13,4 15 to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises ('AEs') were not at arm's length; Reference made to the Transfer Pricing Officer 3. erred in referring the Appellant's case to the Learned Transfer Pricing Officer ('TPO') under Section 92CA(1) of the Act, without satisfying the conditions specified therein; TPO erred in characterizing the distribution fee paid by MSMD to its AE as royalty 4. erred in characterizing the distribution fee paid/ payable by the Appellant to its AES to be in the nature of royalty; Rejection of economic analysis undertaken by the Appellant in its transfer pricing study report 5. erred in not following the Appellant's own order for AY 2010-11 which was passed by the Hon'ble DRP accepting software distributors as appropriate comparable to benchmark the Appellant's international transactions inspite of there being no change in facts in AY 2011-12. 6. erred in rejecting the transfer pricing analysis undertaken by the Appellant under Section 92C of the Act and disregarding the fact that software distributors are appropriate comparables to benchmark MSMD's international transactions in the absence of any direct comparables.
7. erred in law and in facts, in rejecting the following companies from the Transfer Pricing Study for FY 2011-12 which are comparable to the Appellant: (i) Avance Technology Limited (ii) Empower Industries India Limited (iii) Sonata Information Technology Limited (iv) Integra Telecommunication and Software Limited Benchmarking analysis undertaken by the learned TPO/ Hon'ble DRP by considering royalty agreements as Comparable Uncontrolled Price (CUP') to benchmark Appellant's international transactions 8. erred in selecting CUP to benchmark the international transactions of the Appellant without appreciating that Transaction Net Margin ('TNMM') is the most appropriate 3 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) method to benchmark the Appellant's international transactions; 9. erred in not appreciating that a 'distribution' agreement like that entered into by the Appellant with its AE is different from a 'license/ royalty' agreement selected by the Hon'ble DRP/ learned TPO to benchmark the Appellant's international transactions;
10. erred in considering royalty agreements as comparable to benchmark the Appellant's distribution activity with its AEs disregarding the fact that all agreements are functionally different and are entered into in different geographies (i.e other than India) hence the economic and commercial circumstances under which they are entered would he different from the distribution agreement entered into by the Appellant:
Internal comparability 11. erred in not appreciating that while software distributors are appropriate comparables, internal comparables are suitable over the royalty agreements selected by the Hon'ble DRP/ learned TPO to benchmark the Appellant's international transactions:
erred in not subtracting the waiver of license fee of Rs 213,750,000 by Neo Sports Broadcast Private Limited from the subscription revenue in third party segment so as to bring the third party segment on the same footing as AE segment since it is an extra-ordinary item; 13. erred in not appreciating that where internal comparables are considered as suitable comparables, net margins should be considered over gross margins to benchmark the international transaction of distribution fee paid to AEs;
erred in computing the net margin earned by the Appellant from distribution of AE channels at 1.32% and non AE channels at 18.53%; 15. erred in not appreciating that turnover' is not an appropriate allocation key to allocate the common overheads;
erred in not granting economic adjustments on account of the differences in AE and Non AE segment; Short grant of tax deducted at source (TDS) 17. erred in short granting credit of taxes deducted at source of Rs 2,64,14,172 while computing the tax liability for the year, Interest under Section 234D 18. erred in levying interest of Rs 6,56,14,648 under Section 234D of the Act; 19. without prejudice to the above, erred in computing interest under Section 234D at Rs.6,56,14,648 instead of Rs.600,30,423; Penalty Proceedings 4 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
erred in initiating penalty proceedings under Section 271(1)(c) of the Act Each of the above ground of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above ground of appeal at or before the time of hearing of the appeal, so as to enable the Hon'ble Income tax Appellate Tribunal to decide this appeal according to law.‖ Further, the assessee has raised the following additional grounds of appeal before us:
―Ground No.21 Without prejudice to the other grounds, should software distributors be rejected as comparables then Local Cable Operators ('LCOs')/ Multi System Operators (MSOs')/ Direct to Home (DTH') companies can be considered as appropriate comparables. Ground No 22 Without prejudice to royalty agreements selected by the learned TPO/ Hon'ble DRP not being appropriate comparables, the learned TPO/ Hon'ble DRP has erroneously arrived at ALP of 40% by considering the royalty rate of the agreement between Ruffnations Films and New Line Television at 30% instead of 70% Ground No. 23 - Deduction of education and secondary and higher education cess paid on the income-tax liability : The assessee submits that deduction shall be granted under the head "Profits and Gains from Business or Profession" with respect to education cess and secondary higher education cess levied on its income under the Act.‖
2. Briefly stated, the appeal of the assessee was earlier disposed off by the Tribunal vide its order passed in 02.05.2018. The Tribunal while disposing off the appeal had followed its order passed in the assessee‘s own case for A.Y. 2011-12, and had ‗set aside‘ the order of the Transfer Pricing Officer (for short ‗TPO‘) r.w that of the Dispute Resolution Panel (for short ‗DRP‘) to the file of the TPO for afresh benchmarking of the international transactions of the assessee. As the fundamental dispute raised in the appeal, viz. as to whether or not the distribution fees paid by the assessee to its AE‘s were payments in the nature of royalty was not adjudicated upon by the Tribunal, the assessee had therefore filed a miscellaneous application. After necessary deliberations, the 5 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) Tribunal disposed off the assessee‘s miscellaneous application vide its order passed in M.A.No.731/Mum/2018, dated 14.03.2019 and recalled its order that was passed while disposing off the assesse‘s appeal for the year under consideration in dated 02.05.2018. At this stage, we may herein observe that involving identical facts in the assessee‘s case for the immediately preceding year i.e A.Y 2011-12, the Tribunal that was seized of the same issue, viz. as to whether or not the distribution fees paid by the assessee to its AE‘s were to be treated as payments in the nature of royalty, had instead of adjudicating the same restored the matter to the file of the TPO for fresh benchmarking of the international transactions of the assessee. Further, the miscellaneous application filed by the assessee in A.Y 2011-12 seeking recall of the order of the Tribunal for adjudication of the aforesaid issue on merits was dismissed. Assailing the order passed by the Tribunal in M.A No. 769/Mum/2016 (arising from ITA No. 971/Mum/2016), dated 13.04.2018, the assessee had filed a Writ Petition with the Hon‘ble High Court of Bombay. Observing, that all the facts to decide the issue were available on the record, and also, submissions were advanced by the parties before the Tribunal, the Hon‘ble High Court concluded that the Tribunal ought to have decided the issue as to whether the ‗distribution fees‘ paid by the assessee to its AEs was in the nature of royalty or not. Accordingly, the Hon‘ble High Court vide its order passed in CWP NO. 3508 of 2018, dated 03.01.2019 ‗set aside‘ the order that was passed by the Tribunal u/s 254(1), dated 26.07.2017 while disposing off the assessee‘s appeal for A.Y 2011-12 in ITA No. 971/Mum/2016, dated 11.01.2017, and restored the matter to the file of the Tribunal for fresh disposal in accordance with law. We may herein observe that the Tribunal while disposing off the assessee‘s miscellaneous application i.e M.A No. 731/Mum/2018 (arising from ITA No. 1935/Mum/2017) for the year under consideration i.e A.Y 2012-13, had taken cognizance of the fact that its earlier order passed for the immediately preceding year i.e A.Y 2011-12 in ITA No. 971/Mum/2016, dated 11.01.2017, that was followed/relied upon by it while disposing off the appeal of the assessee for the year under 6 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) consideration i.e A.Y 2012-13 in dated 02.05.2018, was ‗set aside‘ by the Hon‘ble High Court, and the appeal was restored for fresh disposal as per the courts order passed in CWP No. 3508 of 2018, dated 03.01.2019. Accordingly, in the backdrop of its aforesaid observations the Tribunal had on the same terms recalled its order passed while disposing off the appeal of the assessee for the year under consideration i.e A.Y 2012-13 in ITA No. 1935/Mum/2018, dated 02.05.2018. To sum up, the appeal of the assessee for the year in question i.e A.Y 2012-13 in ITA No. 1935/Mum/2018, pursuant to the aforesaid order passed by the Tribunal in M.A No. 731/Mum/2018 (arising from ITA No. 1935/Mum/2017), dated 14.03.2019 is posted for fresh hearing qua all the issues therein assailed by the assessee before us.
3. Facts to the extent relevant for the purpose of disposal of the present appeal lies in a narrow compass. The assessee is a joint venture between two unrelated parties, viz. (i) Multi Screen Media Pvt. Ltd. (for short ‗MSM India‘) (now known as Sony Pictures Networks India Pvt. Ltd.) AND Discovery Communications India, and is involved in the distribution of channels to Local Cable Operators (‗LCOs‘)/Multi System Operators(‗MSOs‘)/DTH Operators. The assessee company aggregates and distributes a bouquet of AE and third party channels, viz. general entertainment channels, lifestyle channels, animation channels, kids channels, entertainment channels, knowledge channels, music channels and news channels. The assessee company contracts directly with its AEs for distribution of its channels in India. Under the said distribution agreements the assessee collects subscription revenues and would remit 90% of the same to its AEs as license fee, and retain the balance 10% of the amount 4. The assessee during the year under consideration had e-filed its return of income for A.Y 2012-13 on 28.11.2012, declaring its total income at Rs.22,51,21,420/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. As the assessee during the 7 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) year had entered into international transactions with its AEs, therefore, a reference was made by the A.O to the Transfer Pricing Officer (for short ‗TPO‘) for computing the arm‘s length price (ALP) of the said transactions. The TPO vide his order passed under Sec. 92CA(3), dated 25.01.2016 suggested an upward adjustment of Rs. 413,96,13,415/- to the ALP of the international transactions of the assessee company. After receiving the order passed by the TPO under Sec. 92CA(3), dated 25.01.2016, the A.O, vide his draft assessment order passed u/s 143(3) r.w.s 144C(1), dated 21.03.2016 proposed an addition of Rs. 413,96,13,415/- on account of TP adjustment.
The assessee objected to the aforesaid additions proposed by the A.O before the Dispute Resolution Panel-3, Mumbai (for short ―DRP‖). Before the DRP, the assessee objected to the re-characterisation of the distribution fee paid/payable by the assessee to its AEs as royalty by the TPO. It was the claim of the assessee that it had entered into a distribution agreement with its AEs, as per which it was granted the right to distribute the channels owned by its AEs. Accordingly, it was the claim of the assessee that as it had entered into a distribution agreement and not a license agreement with its AEs therefore, the TPO was in error in adopting royalty search for the purpose of benchmarking its international transactions. In sum and substance, it was submitted by the assessee that what was being transferred by it was a product which it was allowed to distribute as per the terms of the agreement on a principal to principal basis, and not any right to use any trademark etc. It was the claim of the assessee that a perusal of the distribution agreement clearly revealed that it was only acting as an aggregator of channels which were distributed by it to MSOs/LCOs/DTH operators, and thus, played a limited role of aggregating the channels and distributing them on an ‗as is‘ basis without making any modifications to them. In the backdrop of its aforesaid submissions, it was submitted by the assessee that the TPO was in error in recharacterising the distribution agreement as a license agreement. In order to fortify its claim that the payments made by the assessee to its AEs could not be held as ‗royalty‘ the assessee relied on the judgment of the Hon’ble High 8 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) Court of Bombay in the case of Set India Pvt. ltd. (ITA No. 1347 of 2013). Also, support was drawn from the order of the DRP in the case of MSM Satellite (Singapore) Pte. Ltd. for A.Y. 2011-12, wherein it was held that the income received from MSM Discovery Pvt. Ltd. (i.e the assessee) as distribution fee was not to be treated as royalty. However, the DRP was not persuaded to subscribe to the aforesaid claim of the assessee. Observing, that the assessee and its auditor had nomenclatured the payments as ‗license fee paid/payable towards distribution of television channels, the DRP concluded that the payments made to the AEs were in the nature of license fees/royalty for distribution of television channels. Relying on the observations of the panel in the assessee‘s own case for A.Y. 2011-12, the DRP concluded, that as the assessee had been granted exclusive license rights for distribution of channels in a particular territory, it could thus safely be concluded that it had entered into a license agreement. Further, it was observed by the DRP that a similar claim of the assessee that it had only entered into a distribution agreement and not a license agreement was rejected by the panel in A.Y. 2011-12. Also, it was observed by the DRP, that the panel while disposing off the assessee‘s objections for A.Y. 2011-12, had held, that the comparable companies identified by the TPO using RoyaltyStat data were functionally comparable to the assessee. Observing, that the facts involved in the year under consideration were identical to those as were there before the panel in A.Y. 2011-12, the DRP followed its view therein taken. Insofar the claim of the assessee that the Hon‘ble High Court of Bombay in the case of Set India Pvt. ltd. (ITA 1347/Mum/2013) had held that the payments made by the distributors of channels cannot be said to be in the nature of royalty, it was observed by the DRP that the said decision of the Hon‘ble High Court had not been accepted by the department and a ‗Special Leave Petition‘ (for short ‗SLP‘) was filed before the Hon‘ble Supreme Court, which was pending on date. As regards the support that was drawn by the assessee from the order of the DRP in the case of a related entity of the assessee viz. MSM Satellite (Singapore) Pte Ltd. for A.Y. 2011-12, wherein it was held that the distribution 9 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) fee received by the AE from the assessee was not to be held as royalty and was to be treated as business income, it was observed by the DRP that the assessee had contested the said decision and had filed an appeal with the Tribunal which was pending adjudication. In the backdrop of its aforesaid observations the DRP rejected the claim of the assessee that the payments made for distribution of channels could not be held as payment of royalty.
Also, the assessee assailed the order of the TPO, on the ground, that he had erred in rejecting the benchmarking of the ‗distribution fee‘ paid by the assessee to its AEs by selecting TNMM as the most appropriate method using software distributors as comparables in the absence of any direct comparables for distribution of channels. In order to buttress its aforesaid claim, it was submitted by the assessee that the TPO in the assessee‘s own case for A.Y. 2010-11 had accepted the software distributors as appropriate comparables for benchmarking of its international transactions. Further, it was submitted by the assessee that the DRP had also not challenged the appropriateness of the software distribution search criteria/method that was adopted by the assessee in A.Y. 2010-11. The assessee also relied on the order of the ITAT, Mumbai, in the case of NGC Network (India) Pvt. ltd. (ITA No. 5307/Mum/2018) wherein it was held that software distributors are appropriate comparables for benchmarking the channels distribution activity. Accordingly, it was submitted by the assessee that the TPO had erred in rejecting the companies engaged in the business of distribution of software products as comparables on the ground of functional dissimilarity. On the basis of its aforesaid submissions, it was the claim of the assessee that the companies which were selected by it in its TP study report, being functionally comparable ought to have been accepted as comparables, viz. (i) Avance Technology Ltd; (ii) Empower Industries India Ltd.; (iii) Sonata Technology Ltd.; and (iv) Integra Telecommunication and Software Ltd.
However, the DRP after exhaustive deliberations rejected the claim of the assessee that its international transactions were rightly benchmarked by 10 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) selecting comparables from the business activity of licensed software distribution. It was observed by the DRP that the business activity of channel distribution was functionally different from that of distribution of license software. It was observed by the DRP that unlike software distribution, as the assessee in the business of channel distribution had to guarantee minimum business running into several crores therefore, the risk in its business of channel distribution was substantially higher as that involved in the business of distribution of licensed software. It was noticed by the DRP that the assessee in its TP study report had selected comparables from the activity of distribution of licensed software because sufficient information of comparables in its line of business activity was not available in the public domain. But then, as observed by the DRP, now when the TPO had came up with two better alternatives, viz. one, of applying Internal CUP/TNMM as per the revenue sharing arrangement of the assessee with its non-AEs AND second, of adopting the revenue sharing arrangements as per agreements of comparables of distributors engaged in entertainment business available with RoyaltyStat data, therefore, the action of the TPO of rejecting the TP analysis conducted by the assessee of using comparables in licensed software distribution was fully justified. Observing, that the software distribution business was completely different from the business activity of the assessee, considering the functions involved, assets employed and risk undertaken, i.e FAR analysis, the DRP upheld the action of the TPO in rejecting the assessee‘s TP study report, wherein the assesses business of distribution of channels was compared with the business of distribution of licensed software. As the DRP had upheld the benchmarking of the license fees paid towards distribution of channels by applying CUP of license agreements for distribution in media and entertainment business using RoyaltyStat database and not by applying TNMM using the comparables in licensed software distribution business, therefore, the objection of the assessee as regards rejection of the comparables of licensed software distribution business by the TPO was held by the DRP to have been rendered as infructuous.
11 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) 8. After receiving the order passed by the DRP under Sec. 144C(5), dated 23.12.2016, the A.O framed the assessment under Sec. 143(3) r.w.s 144C(13), dated 27.01.2017 and assessed the income of the assessee company at Rs. 436,47,34,830/-.
Aggrieved, the assessee has assailed the assessment framed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 27.01.2017 in appeal before us. The ld. Authorized Representative (for short ‗A.R‘) for the assessee took us through the facts of the case. It was submitted by the ld. A.R that as the Tribunal while disposing off the appeal of the assessee for the immediately preceding year i.e A.Y. 2011-12, despite recording the assessee‘s submissions on the fundamental dispute viz. that the distribution fee paid by it to its AEs was not in the nature of royalty, had instead of adjudicating the same restored the issue to the file of the A.O/TPO for determining the issue afresh, therefore, the assessee had by way of writ petition i.e CWP No. 3508 of 2018 assailed the said order before the Hon‘ble High Court of Bombay. It was submitted by the ld. A.R that the Hon‘ble High Court while disposing off the said writ petition had observed, that the Tribunal ought to have decided the issue as to whether the distribution fees was royalty or not as all the facts were available before it rather than remanding the issue to the TPO. Accordingly, the appeal of the assessee for A.Y 2011-12, viz. was restored by the High Court to the file of the Tribunal for fresh disposal in accordance with law. It was submitted by the ld. A.R that the Tribunal pursuant to the aforesaid directions of the Hon‘ble High Court had thereafter disposed off the assessee‘s appeal for A.Y. 2011-12, vide its order passed in ITA No. 971/Mum/2016, dated 13.03.2020. It was submitted by the ld. A.R, that the Tribunal in its aforesaid order while adjudicating the issue as to whether ‗distribution fee‘ is to be treated as royalty, had therein relied on the order of the Hon’ble High Court of Bombay in the case of CIT Vs. Set India Pvt. Ltd. (ITA No. 1347 of 2013), wherein it was held that distribution fee paid is not to be treated as royalty. As submitted by the ld. A.R, the Tribunal in its aforesaid order has also taken cognizance of the order that was passed by the 12 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
DRP in the case of a related party of the assessee viz. MSM Satellite (Singapore) Pte Ltd. for A.Y. 2011-12, dated 19.12.2014, wherein it was held that distribution fee was not to be treated as royalty income. As submitted by the ld. A.R, the Tribunal in its aforesaid order passed in the assessee‘s own case for A.Y. 2011-12, had after necessary deliberations concluded that the payment of distribution fee cannot be termed as royalty. In order to drive home his aforesaid claim the ld. A.R took us through the order of the Tribunal in the assessee‘s own case for A.Y. 2011-12 in dated 13.03.2020, Page 672-689 of APB. Further, it was submitted by the ld. A.R that a similar view had thereafter been taken by the Tribunal in the assessee‘s own case for A.Y. 2013-14 in ITA No. 6676/ Mum/2017. The ld. A.R took us through the copy of the aforesaid order passed by the Tribunal in the case of the assessee for A.Y.2013-14 in ITA No. 6676/Mum/2017 at Page 733-748 of APB. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the issue that distribution fee could not be held as royalty was squarely covered by the aforesaid orders of the Tribunal in the assessee‘s own case.
Adverting to the benchmarking of the international transactions of the assessee, it was submitted by the ld. A.R that as no direct comparable company was available on the basis of channel distribution search, therefore, the assessee had carried out the search on broad categories of software distribution as mentioned in its TP study report and had selected the following four companies in the final list of its comparables:
Sr. No. Name of the company Updated OP/OR for FY. 2011-12 1. Avance Technology Limited (-)0.43% 2. Empower Industries India Limited (-)1.19% 3. Integra Telecommunication and Software 0.21% Limited 4. Sonata Information Technology Ltd. (-)0.52% Arithmetic Mean (-)0.48% However, the TPO had rejected the aforesaid comparables that were selected by the assessee in its TP study report by carrying out software distribution search, and had determined the ALP on the basis of RoyaltyStat search. Apart 13 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) from that, as stated by the ld. A.R the aforesaid companies were even otherwise held by the TPO as functionally not comparable by observing as under:
“1.Advance Technologies Limited: This company is involved in niche segment of mobile value added services and short code services, m tex, web based SMS, SMS API, mobile marketing solutions, campaign audit, Email web integration etc. Whether the company is engaged in software distribution or not is also clear from the financials or the website of the company. The Hon'ble DRP has rejected this comparable in AY 2010-11. Accordingly, the same is rejected in this year also.
Empower Industries India Limited: Empower lndustries India Limited is engaged in the business of computer electronics, power electronics, and computer hardware/ software development. In the assets it is having computer worth Rs 9.1 crores. This company is selling hardware and is also involved in HR services and Telecom also. No segmental accounts are available. The sale from software is Rs 100.91 crores as against total sales of Rs 150 crores. The margin of this company in FY 2009-10 is 0.30%, FY 2010-11 is 0.19% and FY 2011-12 is (-) 1.19%. This company has diminishing revenue returns. Considering all these factors this company cannot be taken as a comparable.
3. Integra Telecommunications & Software Limited: This company is engaged in IT, telecom and software sector and is functionally not comparable with the assessee. Detailed functional as per the webite of the company shows that it is engaged in Service Contracts (AMC), On site support, ERP and e Commerce solutions. Another salient feature is that this company is engaged in sale of hardware such as computers, peripherals, RAMS, hard discs and printers etc. So, it is functionally not comparable with the assessee and hence rejected.
Sonata Information Technology Limited: Sonata Information Technologies Limited is engaged in trading in computer software as per annual report filed by the assessee. It also provides consultancy services and business solutions. The revenue from such services is Rs 22.3 Crs for FY 2011-12. No Therefore, this company can also not be taken as comparable.‖ It was submitted by the ld. A.R that the aforesaid four comparable companies were also rejected by the TPO in the immediately preceding year i.e A.Y. 2011-12. However, the Tribunal while disposing off the appeal of the assessee for A.Y. 2011-12 in dated 13.03.2020 had after necessary deliberations and considering the nature and activities of the aforesaid companies which were primarily engaged in distribution of software products, held them as good comparables for benchmarking the international transactions of the assessee, and had directed the A.O/TPO to work out the TP adjustment afresh. Accordingly, it was submitted by the ld. A.R that as the 14 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) functionality as that of the assessee as well as the aforesaid comparables had not witnessed any change during the year under consideration, therefore, adopting a consistent approach the same were to be included in the list of the comparables for benchmarking the international transactions of the assessee for the year under consideration. At the same time, it was submitted by the ld. A.R, that inadvertently the Tribunal in its aforesaid order for A.Y. 2013-14 in had directed the A.O/TPO to verify the segmental data of the aforesaid four comparable companies in the relevant financial year as per Rule 10B(4), and re-compute the TP adjustment afresh. It was submitted by the ld. A.R that the software distribution was the only segment of the aforementioned comparables. Accordingly, it was submitted by the ld. A.R, that considering the observations of the Tribunal in its aforesaid orders passed in the assessee‘s own case for A.Y. 2011-12 and A.Y. 2013-14 the matter may be restored to the file of the A.O/TPO with a direction to benchmark the international transactions of the assessee after including the aforementioned four companies in the final list of comparables.
Adverting to the additional grounds of appeal
which were raised by the assesses before us, it was submitted by the ld. A.R that in case if the aforementioned four companies which were into software distribution business were accepted as valid comparables, then the ground of appeal no. 21 would be rendered as infructuous.
12. As regards the additional ground of appeal No. 22, it was submitted by the ld. A.R that as the issue therein involved had already been rectified by the A.O, the same was thus not being pressed.
13. As regards the additional ground of appeal No. 23, it was submitted by the ld. A.R that the assessee had therein sought deduction of ‗Education cess‘ and ‗Secondary higher education cess‘ while computing its income under the head ‗Profit and gains of business or profession‘. It was submitted by the ld. A.R that as the aforesaid additional ground of appeal involved an adjudication of a legal issue based on the facts available on record, the same may 15 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) therefore be admitted. It was submitted by the ld. A.R that the issue therein involved was squarely covered by the judgment of the Hon‘ble High Court of Bombay in the case of Sesa Goa Ltd. Vs. JCIT (117 taxman.com 96) (Bom). Also, support was drawn from the recent order of the ITAT, Mumbai in the case of Voltas ltd. Vs. ACIT [117 Taxman.com 547] (Mumbai). It was submitted by the ld. A.R that in the aforesaid order the Tribunal after admitting the additional ground of appeal in context of the issue under consideration, had therein adjudicated the same in favour of the assessee. Also, reliance was placed on certain other orders of the coordinate benches of the Tribunal to which our attention was drawn by the ld. A.R .
14. Per contra, the ld. Departmental Representative (for short ‗D.R‘) vehemently objected to the admission of the aforesaid additional ground of appeal. In support of his objection the ld. D.R had filed before us ‗Written submissions‘, wherein he had emphasised that the aforesaid additional ground of appeal did not merit admission. Also, the ld. D.R had tried to impress upon us that the orders of the Hon‘ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers & Shareholders Pvt. ltd. (2012) 349 ITR 336 (Bom) and that of the Hon‘ble Supreme Court in the case of National Thermal Power Corporation Ltd. Vs. CIT (1998) 229 ITR 383 (SC) were not applicable to the facts of the case before us.
15. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements pressed into service by them. Before proceeding any further, we shall first deal with the issue as to whether or not the additional ground of appeal No. 23 raised by the assessee before us, wherein it had sought deduction of ―Education cess‖ and ―Secondary and higher education cess‖ paid on the income-tax liability while computing its income under the head ―Profits and gains of business or profession‖, merits admission. It was submitted by the ld. A.R that the aforesaid additional ground of appeal was being raised on the basis of the recent judgment of the Hon’ble 16 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). The ld. A.R submitted that the Hon‘ble High Court in its said judgment had observed, that if the legislature intended to prohibit the deduction of amounts paid by an assessee towards ―Education Cess‖ or any other ―Cess‖ and Higher and Secondary Education Cess, then, the legislature could have easily included reference to ―cess‖ in clause (ii) of Sec. 40(a). It was further submitted by the ld. A.R that the High Court had observed, that as the legislature had not included ―education cess‖ or any other ―cess‖ in clause (ii) of Sec. 40(a), therefore, it would mean that there was no prohibition in claiming deduction of the said amounts while computing the income of the assessee under the head ―Profits and gains of business or profession‖. As regards admissibility of the said issue by way of an additional ground of appeal
, it was submitted by the ld. A.R, that the Hon‘ble High Court in its aforesaid order, had observed, that where the assessee had raised a claim for deduction of the amount paid towards ―cess‖, such claim for deduction was bound to be considered by the CIT(Appeals) or the ITAT before whom such claim was specifically raised.
16. Per contra, the ld. D.R objected to the admission of the aforesaid additional ground of appeal raised by the assessee before us. The ld. D.R had filed his written objections to the admission of the aforesaid additional ground of appeal raised by the assessee. Emphasizing on the fact that the assessee had not even revised its return of income u/s 139(5) of the Act, it was submitted by the ld. D.R that the attempt on the part of the assessee to reduce its income below the returned income by raising an additional ground of appeal was not permissible under law. Accordingly, it was the claim of the ld. D.R, that if the additional ground of appeal raised by the assessee was admitted and therein allowed, the same would result to reduction of the income below the returned income despite the expiry of the time limit provided for filing of a revised return of income under Sec. 139(5) of the Act. In sum and substance, it was the claim of the ld. D.R that raising of an unconnected issue vis-a-vis regular assessment cannot be allowed by way of an additional 17 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) ground in the course of the appellate proceedings so as to reduce the income of the assessee below the returned income. In order to drive home his aforesaid claim the ld. D.R had drawn support from Circular No. 14 (XL-35), dated 11.04.1955, which as per him was issued in context of Sec. 23 of Income-tax Act, 1922, that is pari materia to Sec. 143(2) of the Income-tax Act, 1961, and is no more applicable. Interestingly, the ld. D.R had tried to impress upon us that the raising of additional grounds after several years in the course of the appellate proceedings is an indirect revision of income sought by an assessee through appeal route. Accordingly, it was averred by the ld. D.R that the aforesaid additional ground of appeal raised by the assessee may not be admitted.
17. As observed by us hereinabove, the assessee has sought an adjudication on an issue i.e as to whether or not the amount paid by an assessee towards ―Education Cess‖ or any ―other cess‖ viz. the Secondary and Higher Education Cess is disallowable as an expenditure u/s 40(a)(ii) of the Income-tax Act, 1961. We have deliberated at length on the objections raised by the ld. D.R to the raising of the aforesaid additional ground of appeal by the assessee and are unable to persuade ourselves to subscribe to the same. Before adverting any further, we shall look into the various judicial pronouncements, on the aspect, that an assessee is vested with a right to raise an additional claim which though might not have been raised in the return of income, and the appellate authorities are entitled to consider and adjudicate the same. We find that the issue as to whether an assessee in the course of the assessment proceedings could be permitted to raise a claim which would lead to exclusion of an income offered by him in his return of income had been deliberated upon at length by the Hon’ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers & Shareholders (P) Ltd. (2012) 349 ITR 336 (Bom). In its said judgment, it was held by the Hon‘ble High Court that an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims to wit claims not made in the return filed by it. In the aforesaid case of Pruthvi Broker & 18 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) Shareholders (Pvt.) Ltd. (supra), the facts before the Hon‘ble jurisdictional High Court were that the assessee company had made a payment of SEBI fees of Rs.40 lac on 09.5.2003 (pertaining to F.Y. 2001-02) that was allowable as a deduction on payment basis u/s 43B of the Act. However, during the assessment year 2004-05, by way of an inadvertence the assessee company in its return of income had claimed a deduction of Rs.20 lac only as against the correct claim of deduction of Rs.40 lac. The assessee‘s claim for deduction u/s 43B of an amount of Rs. 40 lac was rejected by the A.O on the ground that he had no authority to allow any relief or deduction which had not been claimed in the return. On appeal, the CIT(A) and the Tribunal held the omission to claim the deduction of Rs.40 lac to be inadvertent, and after considering the fact that the assessee had by way of a bonafide mistake wrongly restricted its claim for deduction at Rs.20 lac, therein allowed its claim of deduction of Rs. 40 lac. On further appeal by the revenue, the High court while upholding the relief allowed by the lower authorities observed, that even assuming that the Assessing Officer was not entitled to grant a deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities were entitled to consider the claim and to adjudicate the same. It was further observed by the Hon‘ble High Court that an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims to wit claims not made in the return filed by it. The Hon‘ble High Court while concluding as hereinabove, had observed, that the error in not claiming the deduction in the return of income was inadvertent and could not be inter alia faulted, as there was nothing on record that would suggest that the omission on the part of the assessee as regards raising of the correct claim of deduction u/s 43B was deliberate, mala-fide or otherwise. Accordingly, the Hon‘ble High Court observing that the omission was inadvertent upheld the order of the Tribunal that had allowed the assessee‘s claim of deduction. Insofar the judgment of the Hon’ble Supreme Court in the case of Goetze (India) Limited v. Commissioner of Income-tax (2006) 284 ITR 323 (SC) was concerned, the Hon‘ble High court in its aforesaid order had 19 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) observed, that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. As regards the jurisdiction of the appellate authorities to entertain a claim that was not raised by the assessee in its return of income, the Hon‘ble High Court after referring to the judgment of the Hon‘ble Supreme Court in the case of Goetze (India) Limited (supra), had made it clear that the issue in the case before the Hon‘ble Apex Court was limited to the power of the assessing authority in entertaining a fresh claim raised by an assessee otherwise than by filing of a revised return of income, and the same did not impinge on the powers of the Tribunal. In the case before the Full Bench of the Hon’ble High Court of Bombay in Ahmedabad Electricity Limited v. Commissioner of Income-tax, (1993) 199 ITR 351 (Bom)(FB), the assessee had not claimed deduction in respect of the amounts it was required to transfer to contingencies reserve and dividend and tariff reserve either before the Income Tax Officer or before the Appellate Assistant Commissioner. On further appeal, the assessee raised a new claim and additional grounds before the Tribunal, which however declined to admit the same. On further appeal, the full bench of the Hon‘ble High Court observed, that the Tribunal had jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of AAC so long as these grounds are in respect of the subject-matter of the entire tax proceedings. While concluding as hereinabove, it was observed by the Hon‘ble High court that unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of an assessee in accordance with law. Further, support is drawn from the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Prabhu Steel Industries Pvt. Ltd.(1988) 171 ITR 530 (Bom). In the case before the Hon‘ble Jurisdictional High Court, the ITO had rejected the assessee's claim for deduction under s. 80J, inter alia, on the ground that the assessee had not claimed it in its return of income. On appeal, the AAC held that since the claim was made by the assessee during the course of the assessment proceedings, the ITO should not have rejected it. On further appeal by the revenue, the Tribunal held that 20 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) the AAC was fully justified in entertaining the claim for deduction under Sec. 80J because the claim was made by the assessee before the assessment was completed, i.e., during the assessment proceedings. On further appeal by the revenue, the Hon‘ble High Court while upholding the view taken by the AAC and the Tribunal observed, that as the claim for deduction was raised by the assessee in the course of the assessment proceedings, the ITO was obliged to entertain it and consider the same on merits. In the case before the Hon’ble High Court of Madhya Pradesh in the case of Steel Ingots (P) Ltd. Vs. CIT (1996) 86 Taxman 440 (MP), the High Court while setting aside the order of the Tribunal which had declined to consider the grounds raised by the assessee on the linchpin that the same were not raised before the CIT(A) and had dismissed the appeal observed, that though the question was not raised by the assessee before the first appellate authority, but then, the question was one of law and had material bearing on the order of assessment. It was observed by the Hon‘ble High Court that as the eventual destination of every litigation is justice, therefore, technicality should not be permitted to prevail as speed breaker in the course of dispensation of justice. On the basis of the aforesaid judicial pronouncements, we are of the considered view, that in the case before us as the assessee has by way of the aforesaid additional ground of appeal raised a purely legal issue which would not require any verification of facts, therefore, the same merits to be admitted.
18. We shall now deal with the sustainability of the observations of the lower authorities, and the consequential additions made/sustained by them. As observed by us hereinabove, the ld. A.R at the very outset of the hearing of the appeal had assailed the characterisation of the channel distribution fees paid by the assessee to its AE‘s, as royalty by the A.O/DRP. We have deliberated at length on the issue under consideration, and find, that the issue that channel distribution fees cannot be held as royalty is squarely covered by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Set India Pvt. Ltd. (ITA No. 1347 of 2013), dated 15.06.2015. The question 21 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) of law raised by the revenue before the Hon‘ble High Court in the aforesaid case read as under:
―Whether on the facts and in the circumstances of the case and in law, the Tribunal has erred in holding that consideration paid by assessee to the non resident company for acquiring right to distribute TV channels is not in the nature of Royalty but is in the nature of business income therefore not subjected to withholding tax?‖ Relying on its earlier order passed in the case of Set Satellite (Singapore) Pte. Ltd Vs Deputy DIT (2008) 307 ITR 205 (Bom), the Hon‘ble High Court had observed that no substantial question of law was involved as the issue was already decided in the favour of the assessee. In fact, we find that the aforesaid issue had also been looked into by the Tribunal in the assessee‘s own case for A.Y. 2011-12 in dated 13.03.2020. In its aforesaid order, it was observed by the Tribunal that as the assessee had merely acted as an intermediary between the broadcaster and the ultimate customers to use the channels, therefore, the distribution fee paid by the assessee to its AEs could not be termed as royalty. The Tribunal while concluding as hereinabove had observed as under:
―22. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. The first issue for our consideration is whether the 'distribution fee' is in the nature of 'Royalty' or not. Before us the ld. AR for the assessee vehemently submitted that the TPO wrongly characterized the channel distribution fee as Royalty. It was further explained that the assessee acts as a intermediary between the broadcaster and the ultimate customers who uses the channels. Thus, distribution fee paid by the assessee cannot be termed as Royalty. This fact in not controverted by Id. DR for the revenue nor any contrary facts were brought on record by the lower authorities. The id. DRP in assessee's MSM Satellite (Singapore) Pte. Ltd in its order dated 19.12.2014 for AY 2010-11 by following the order of Tribunal for AY 2005-06 & 2006-07 dated 28.08.2015 held that distribution revenue is not Royalty income. The Hon'ble Bombay High Court in CIT Vs SET India Pvt. Ltd (ITA No. 1347 of 2013) held that the distribution fee paid is not in the nature of royalty. Similar view was affirmed by Hon'ble Bombay High Court in CIT Vs MSM satellite (Singapore) Pte. Ltd (ITA No. 103 of 2017). Considering the decision of the Hon'ble Jurisdictional High Court and respectfully following the same, we are of the view that the payment of distribution fee cannot be termed as 'Royalty'. Since, we have held that distribution fee cannot be termed as 'Royalty' thus; discussion on the royalty agreement selected for comparability has become academic.‖ 22 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) As the facts and the issue involved in the present appeal is squarely covered by the aforesaid order of the Tribunal in the assessee‘s own case for A.Y 2011-12 in dated 13.03.2020, we therefore respectfully follow the same. Accordingly, we herein vacate the view taken by the lower authorities that channel distribution fees paid by the assessee to its AEs was in the nature of payment of royalty. The Ground of appeal No. 4 is allowed.
19. We shall now advert to the adoption of the aforementioned four companies engaged in the business of software distribution as comparables by the assessee for benchmarking its international transactions. As observed by us hereinabove, both the TPO/DRP had rejected the aforementioned companies as comparables for benchmarking of the international transactions of the assessee. The facts pertaining to the respective comparables, and also, the view taken by the lower authorities as well as our observations as regards the same are culled out as under: (A) Avance Technology Ltd: (i) On a perusal of the order of the TPO, it stands revealed that the company was rejected as a valid comparable, for the reason, that it was engaged in providing mobile value added services, sort code services, m tex, web based SMS, SMS API, mobile marketing solutions, campaign audit, email web integration etc. The TPO while concluding as hereinabove had as a matter of fact relied upon the reasons provided by his predecessor in the assessee‘s own case for the immediately preceding year i.e A.Y. 2011-12. Also, the TPO had relied on the order passed by the DRP rejecting the aforesaid company as a valid comparable in the case of the assessee for A.Y 2010-11 (ii) We find that the aforesaid company which was rejected as a comparable by the TPO/DRP in the assessee‘s own case for A.Y 2011-12, on appeal, was however accepted by the Tribunal as a valid comparable. Further, 23 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) the aforementioned company was also accepted as a valid comparable by the Tribunal while disposing off the appeal of the assessee for A.Y. 2013-14 in dated 29.06.2020. (iii). As is discernible from the financial statements of the aforementioned company, we find, that it had during the year under consideration generated 100% of its revenue from sale of software products. Further, the aforementioned company viz. Avance Technology Ltd. had maintained inventory software products, and also, the quantitative details of the stock of software products, purchases and sale. As per the segment reporting of significant accounting policy, the aforementioned company has only one segment of IT products i.e software distribution. Accordingly, in the backdrop of the aforesaid factual position, we find that the aforesaid company which had generated its entire revenue from sale of software product could safely be adopted as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. As the functions of the aforementioned company had not witnessed any change as in comparison to the immediately preceding and succeeding years i.e A.Y.2012-13 and A.Y. 2013-14, therefore, finding no reason to take a different view we respectfully follow the aforesaid order of the Tribunal, and direct the A.O/TPO to include the aforementioned company in the final list of comparables for benchmarking the international transactions of the assessee for the year under consideration. (B) Empower Industrial India Ltd.: As is discernible from the order of the TPO, we find that the aforementioned company was rejected as a comparable by him for the reasons viz. (i) that the company was engaged in selling hardware, HR and telecom services for which no segmental were available; (ii) that the company was inter alia engaged in software development; (iii) that the company had computer assets of Rs. 9.1 crores; and (iv) that the company had diminishing returns during the year under consideration. As a matter of fact, the aforesaid view was 24 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) borrowed by the TPO from that arrived at by his predecessor in the immediately preceding year i.e A.Y. 2011-12. (ii) On a perusal of the financial statements of the aforementioned company, we find, that it had during the year under consideration earned revenue of Rs.148.28 crores from IT product sales (out of total revenue of Rs.150.45 crores). Accordingly, the aforementioned company had earned more than 98% (approx.) of its revenue from sale of software products, and was thus primarily engaged in distribution of software products. Apart from that, the company had during the year purchased software amounting to Rs. 140,99,17,034/- which constituted 95% of its total purchases. As per the ‗annual report‘ the company had maintained the quantitative details of the software packages purchased. Also, the significant accounting policy of the aforementioned company states that it has only one segment of dealing in IT products i.e software distribution. Insofar, the observation of the TPO that the aforementioned company had earned revenue from HR and telecom services, we find that no revenue was generated by the company from telecom sales. Insofar the HR services are concerned, we find, that the company had earned a miniscule income of Rs.2.16 cores (out of total sales of Rs.150.45 crores), which constitutes only 1.4% of its revenue. Further, the TPO had rejected the aforementioned company as a comparable, for the reason, that it was engaged in software development. However, we find ourselves to be in agreement with the ld. A.R that nowhere in the ‗annual report‘ it is mentioned that the aforementioned company was engaged in provision of software development services. As a matter of fact, the various disclosures in the ‗annual report‘ clearly show that the company was engaged only in software distribution activity. Also, the fact that the employee cost to sales ratio of the aforesaid company was only 1.29%, therein clearly reveals that it did not have employees having the requisite skill set to provide software development services. As regards the view taken by the TPO that as the company owned computer assets of Rs.9.1 crores, therefore, it was to be rejected as a valid comparable, the same does not find favour with us. As per the records the 25 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) computer assets owned by the aforementioned company were in the nature of its ordinary assets which were necessary for carrying on of its business in the normal course, and the said fact on a standalone basis could not have justified rejection of the company as a valid comparable. Also, the observation of the TPO, that the fact that the aforementioned company had diminishing returns formed a basis for rejecting it as a comparable, we are afraid cannot be accepted. As the company is not a persistent loss maker, and in fact, has earned a profit in the previous year i.e financial year 2010-11, thus it could not have been rejected merely on the basis of a generalised view of diminishing returns arrived at by the TPO. On the basis of the aforesaid observations, we are unable to persuade ourselves to subscribe to the view taken by the TPO/DRP that the aforementioned company could not have been selected as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. (iii). Independent of our aforesaid observations, we find, that the aforementioned company viz. Empower Industries India Ltd. had been accepted by the Tribunal as a valid comparable in the assessee‘s own case for the immediately preceding year i.e. A.Y. 2011-12. Also, we find that the aforementioned company had been accepted as a valid comparable by the coordinate benches of the Tribunal in the following cases: (i) Turner International India Pvt. Ltd. VS. ACIT (ITA No. 1204/Del/2018) dated 18th June 2018 [A.Y. 2006-07]; (ii) DCIT Vs. Turner International Pvt. Ltd. (ITA No. 1149/Del/2015) dated 8th October 2018 [A.Y. 2010-11]; and (iii) Star Den Media Services Pvt. ltd. Vs. ACIT (ITA No. 2113/M/2014). Accordingly, on the basis of our aforesaid deliberations we are unable to accept the view taken by the A.O/DRP who had rejected the aforementioned company as a valid comparable. We thus direct the A.O/TPO to include the said company as a valid comparable for the purpose of benchmarking the international transactions of the assessee for the year under consideration.
26 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) (C) Sonata Information Technologies Ltd.: (i) As per the order passed by the TPO the aforementioned company was rejected as a comparable, for the reason, that it was engaged in software trading, consultancy services and business solutions. As a matter of fact, the TPO while concluding as hereinabove had followed the view taken by his predecessor in the immediately preceding year i.e A.Y. 2011-12. (ii) We find that the TPO in A.Y. 2010-11 had accepted the aforementioned company as a valid comparable for the purpose of benchmarking of the international transactions of the assessee for the said year. Accordingly, in the absence of any shift in the FAR analysis of the aforementioned company during the year under consideration, as against that for the immediately preceding year, we find no justification in adoption of an inconsistent approach by the TPO for rejecting the same as a valid comparable during the year under consideration. (iii) On a perusal of the financial statements of the aforementioned company, we find that during the year under consideration it had earned a revenue of Rs.771.18 crores from distribution of software products (out of total sales of Rs.793.51 crores). Accordingly, the aforementioned company had generated 97.19% of its total revenue from sale of software products. Apart from that, the purchases of traded items of the above mentioned company amounted to Rs.769.16 crores during the year under consideration. As regards the observation of the TPO that the aforementioned company had earned income from consultancy services and business solutions, the same we find constitutes only 2.81% of its total revenue for the year under consideration. Also, the low employee cost to sales ratio of only 3.43% in itself substantiate the fact that the aforementioned company did not have the employees with the requisite skill set to provide consulting services and business solution which are high end services in nature. Accordingly, on the basis of our aforesaid observations, we are unable to to subscribe to the reasoning given by the TPO for rejecting the aforementioned company as a valid comparable for 27 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) benchmarking the international transactions of the assessee for the year under consideration. (iv). Independent of our aforesaid observations, we find, that the Tribunal in the assesses own case for the immediately preceding year i.e. A.Y. 2011-12 had accepted the aforementioned company whose generation of revenue from software distribution during the said year was 97%, as a valid comparable, for benchmarking the international transactions of the assessee for the said preceding year. Also, the aforementioned company was selected as a valid comparable by the Tribunal while disposing off the assessee‘s appeal for A.Y. 2013-14 in ITA 6676/Mum/2017, dated 29.06.2020. In the backdrop of our aforesaid deliberations, as the functionality of the aforementioned company and also the assessee had not witnessed any change during the year under consideration, as in comparison to that for A.Y. 2012-13 and A.Y. 2013-14, we thus find no cogent reason to take a view different from that arrived at by the Tribunal in the aforementioned orders in the case of the assessee. Accordingly, we direct the A.O/TPO to include the aforesaid company as a valid comparable for the purpose of benchmarking the international transactions of the assessee for the year under consideration. (D) Integra Telecommunications Software Ltd. (i) The TPO had rejected the aforementioned company as a valid comparable for the reason, viz. (i) that the company was engaged in IT, telecom and software sector ; (ii) that as per the website the company was engaged in service contracts (AMC), onsite support, ERP and commerce solutions; and (iii) that the company was engaged in sale of hardware such as computers, peripherals, RAMs, Hard Disc & Printers etc. (ii). We have perused the financial statement of the aforementioned company, and find, that during the year under consideration it had earned 100% of its revenue from sale of software products. As regards the observations of the TPO that the aforementioned company was engaged in 28 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) the business of IT telecom and software sector, we are afraid that there is no such reference in the ‗annual report‘ of the company. On the contrary, the ‗annual report‘ of the company suggests that the company was engaged only in trading of software products. Insofar the observations of the TPO that as the aforementioned company was engaged in service contract (AMC), onsite support, ERP and commerce solutions, therefore, the same not being functionally comparable to the assessee could not have been selected as a valid comparable, we find is based on misconceived facts. On a perusal of the records, we find that the aforementioned contracts entered into by the company were linked to its software distribution activity and hence, the same could not have formed a base for rejection of the same as a valid comparable. Accordingly, on the basis of our aforesaid observations, we are not inspired by the reasoning given by the TPO for rejecting the aforementioned company which was into software distribution business, as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. (iii). Independent of our aforesaid observations, we find, that the abovementioned company viz. Integra Telecommunication and software had been accepted as a valid comparable by the Tribunal in the assessee‘s own case for A.Y. 2013-14 in dated 29.06.2020. In the backdrop of our aforesaid observations, as the functionality of the aforementioned company and also the assessee had not witnessed any change during the year under consideration, therefore, we find no reason in taking a view contrary to that arrived at by the Tribunal while accepting the said company as a valid comparable for benchmarking the international transactions of the assessee in A.Y 2013-14. Accordingly, we herein direct the A.O/TPO to include the aforementioned company as a valid comparable for the purpose of benchmarking the international transactions of the assessee for the year under consideration. On the basis of our aforesaid deliberations, the A.O/TPO is directed to include the aforesaid four companies viz. (i). Avance Technology Limited; (ii). Empower Industries India Limited; (iii).
29 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) Integra Telecommunication and Software Limited; and (iv). Sonata Information Technology Limited, in the final list of comparables for benchmarking the international transactions of the assessee for the year under consideration. The Grounds of appeal
Nos. 5 to 7 are allowed in terms of our aforesaid observations.
20. The assessee has assailed before us the short grant of TDS of Rs.2,64,14,172/- by the A.O while computing its tax liability for the year under consideration. As the adjudication of the aforesaid issue would require verification of records, therefore, we restore the issue to the file of the A.O. The A.O is directed to verify the aforesaid claim of the assessee, and in case there is any short credit of TDS, the same may therein be allowed. The Ground of appeal No. 17 is allowed for statistical purposes.
21. As regards the claim of the assessee that the A.O had erred in computing interest under Sec. 234 of Rs.6,56,14,648/- instead of Rs.600,30,423/-, the same we find would be consequential to the giving effect to our aforesaid observations. Accordingly, the A.O is directed to recompute the same after giving effect to our observations recorded hereinabove. The Ground of appeal No. 18 and 19 are allowed for statistical purpose.
22. The assessee has assailed before us the initiation of penalty proceedings under Sec. 271(1)(c). As the aforesaid grievance of the assessee is premature, therefore, the same is dismissed as such. The Ground of appeal No. 20 is dismissed.
23. As we have accepted the aforementioned four companies which were into software distribution business as valid comparables for benchmarking the international transactions of the assessee, therefore, the additional ground of appeal no. 21 as per the concession of the ld. A.R is dismissed as not pressed.
24. As regards the additional Ground of appeal No. 22, the issue therein involved having been rectified by the AO, thus does not survive any more.
30 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) Accordingly, the additional ground of appeal no. 22 is dismissed as having been rendered as infructuous.
25. We shall now deal with the merits of the additional ground of appeal no. 23 raised by the assessee before us, wherein it had sought deduction of ―Education cess‖ and ―Secondary and higher education cess‖ paid on the income-tax liability while computing of its income under the head ―Profits and gains of business or profession‖. 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 issue raised before us. 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 Education Cess and Higher and Secondary Education Cess is allowable as a deduction in the year of payment.” After exhaustive deliberations, the Hon‘ble High Court had observed that the legislature in Sec. 40(a)(ii) had though 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‖, but then there was no reference to any ―cess‖. Also, the High Court observed that there was no scope to accept that ―cess‖ being in the nature of a ―tax‖ was equally not deductible in computing the income chargeable under the head ―profits and gains of business or profession‖. It was further observed that if the legislature would had intended to prohibit the deduction of amounts paid by an assessee towards say, ―education cess‖ or 31 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) any other ―cess‖, then, it could have easily included a reference to ―cess‖ in clause (ii) of Section 40(a). On the basis of its aforesaid observations, the Hon‘ble High Court had concluded that now when the legislature had not provided for any prohibition on the deduction of any amount paid towards ―cess‖ in clause (ii) of Sec. 40(a), therefore, holding to the contrary would amount to reading something which is not to be found in the text of the provision of Sec. 40(a)(ii). Accordingly, the Hon‘ble High Court had concluded that there was no prohibition on the deduction of any amount paid towards ―cess‖ in Sec. 40(a)(ii), while computing the income chargeable under the head ―profits and gains of business or profession‖, observing as under :
―16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head ―Profits and gains of business or profession‖, - (a) in the case of any assessee – (ia)........................... (ib)................................ (ic) …............................ (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. [Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for 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 under the head ―profits and gains of business or profession‖.
32 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. Vs 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 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 vs Motors & General Stores 66 ITR 692 (SC)]. 20. 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 Vs Radhe Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear Vs State of Haryana 188 ITR 402(SC)]. 21. There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207]. 22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that ―any rate or tax levied‖ on ―profits and gains of business or profession‖ shall not be deducted in computing the income chargeable under the head ―profits and gains of business or profession‖. There is no reference to any ―cess‖. 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 Section 40(a)(ii) which read as follows :
33 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
―(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‖ 25. 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 :- ―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 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, 34 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
―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 Vs Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government 15 TXA17&18-13 dt.28.02.2020 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 Vs 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. Vs CIT Range-2, Kota ), by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held 16 TXA17&18-13 dt. 28.02.2020 that the ITAT erred in holding that the ―education cess‖ is a disallowable expenditure under Section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee.
Mr. 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.
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 35 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
implications, when construing a taxing statute. Even, though, ―cess‖ may be collected as a part of income 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 Vs 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.
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.
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.
In CIT Vs Pruthvi Brokers & Shareholders Pvt. 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 36 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2)
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 Vs CIT (199 ITR 351) to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which 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.
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 Appellant – Assessee and against the Respondent – Revenue.‖ Accordingly, we respectfully follow the aforesaid judgment of the Hon‘ble High Court of Bombay in the case of Sesa Gold Limited (supra), and therein conclude that the assessee shall be entitled for deduction under the head ―Profits and Gains from Business or Profession‖ of the amount of ―Education Cess‖ and the ―Secondary higher Education Cess‖ levied on its income under 37 MSM Discovery Pvt. Ltd. Vs. The Asst. Commissioner of Income Tax-12(3)(2) the Act. The additional ground of appeal
no. 23 raised by the assessee is allowed.
26. Resultantly, the appeal of the assessee is partly allowed in terms of our aforesaid observations. Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.