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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri J. Sudhakar Reddy, AM & Shri A. T. Varkey, JM]
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri J. Sudhakar Reddy, AM and Shri A. T. Varkey, JM] I.T.A. No.2567/Kol/2019 Assessment Year: 2011-12
DCIT, Circle-8(1), Kolkata M/s TM International Logistics v. Ltd., Kolkata
(PAN:AABCT5399M) Appellant Respondent
C.O. 12/Kol/2020 (in I.T.A. No.2567/Kol/2019) Assessment Year: 2011-12 M/s TM International Logistics DCIT, Circle-8(1), Kolkata Ltd., Kolkata v.
(PAN:AABCT5399M) Cross-Objector Respondent
Date of Hearing 11.03.2021 Date of Pronouncement 24.03.2021 For the Appellant Smt. Ranu Biswas, Addl. CIT For the Respondent Shri Nageswar Rao, AR
ORDER Per Shri A. T. Varkey, JM: This appeal preferred by the Revenue and cross-objection by the assessee are against the order of Ld. CIT (Appeals)-7, Kolkata dated 25.09.2019 for Assessment year 2011-12.
Ground No.1 of the Revenue and Ground No.5 of the C.O of the assessee is against the action of the Ld. CIT(A) in deleting the disallowance made by the A.O
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
amounting to Rs.60,92,442/- on account of Royalty payable to Kolkata Port Trust (hereinafter KoPT) which has been shown in the books as ‘estimated liability’.
Brief facts of the case as noted by the A.O is that on a perusal of the audited balance sheet of the assessee, he observed that assessee has charged an amount of Rs.3,26,85,306/- in the P&L A/c against royalty paid to KoPT. The A.O asked the assessee to provide the details of the payment and the TDS deducted and paid thereof. According to the A.O, the assessee submitted that it has provided a sum of Rs.60,92,442/- on account of royalty payable to KoPT and the said provision has been created pursuant to the independent auditor’s report with which the company does not agree. According to the A.O, this statement clearly shows that a sum of Rs.60,92,442/- was in the nature of a provision and therefore, an unascertained liability. According to him, the assessee had deducted TDS on the payment of Rs.2,65,92,864/- while the balance amount of Rs.60,92 442/- had been provided in the books as “estimated liability’ on which TDS was neither deducted nor paid. According to him, it is evident that the sum of Rs.60,92,442/- is merely an estimated liability arising out of a contractual obligation which is under dispute and the arbitration proceedings are going on and therefore, the fate of this liability is contingent upon the outcome of the arbitration. In other words, this liability has not crystallized as on 31.03.2011 and is a contingent liability on the balance sheet submitted by the assessee; and since this liability was also not paid by the assessee this being a contingent liability, the sum of Rs.60,92,442/- was disallowed for deduction as expenditure u/s.37 of the Act and added back in computing the income. Thereafter, the A.O observes that the assessee debited this expenditure in respect of Berth No.12 at Haldia which is eligible for deduction u/s.80IA of the Act. Therefore, this disallowance will reflect into fresh computation of deduction u/s 80IA of the Act and therefore he disallowed Rs.60,92,442/-.
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
Aggrieved the assessee preferred an appeal before the ld. CIT(A) who was pleased to delete the same by holding as under:
“5.2. have considered the submission of the AR of the appellant in the backdrop of the assessment order. The brief facts of the matter are that an amount of 60,92,442/- treated as a provision towards royalty payable to Kolkata Port Trust (KOPT) was debited to the P&L A/c of the appellant. The AO observed that such amount was in the nature of a provision and therefore an unascertained liability on which TDS was not effected. The AO further 'observed that this liability had not crystallized as on 31.03.2011 and being contingent in nature was not an allowable expenditure u/s 37 of the Act. 1 find the similar issue had been decided by the erstwhile jurisdictional CIT(A) in the appellant's own case for the AY 2009- 10 (supra) wherein the claim of the appellant was allowed vide Appeal No. 759/CIT(A)- 3/Cir-8(1)/Kol/14-15 dated 05. 12.2018. At the ITAT stage as well, the appeal filed by the department on the same issue against the appellant for the AY 2009-10 was dismissed (supra) vide 1TA No.988/Ko/2013 dated 17.03.2017. In such view of the matter, since there are judicial precedents in favour of the appellant in the matter under dispute, the AO is directed to delete the impugned disallowance of Rs.60,92,442/-. These grounds are allowed.” 5. Aggrieved, the Revenue has preferred an appeal before us and the assessee has preferred ground no. 5 of its C.O. i.e. without prejudice to the action made by the A.O, and the Ld. CIT(A) who has deleted the disallowance, however according to the assessee, even if this expenditure is disallowed, since this expenditure claimed was in respect of Berth No.12 at Haldia which the AO has accepted to be eligible for deduction u/s.80IA of the Act, then in any event, even if the Revenue succeeds on this ground of appeal, then the assessee should be given the consequential relief while computing the 80IA deduction.
We have heard both the parties and perused the records. It was brought to our notice that in assessee’s own case, similar issue had cropped up in A.Y 2009-10 wherein the A.O in similar factual circumstances had disallowed the expenditure and the Ld. CIT(A) had allowed it and this action when challenged by the Revenue before the Tribunal, was adjudicated in assessee’s favour by upholding the Ld. CIT(A)’s action by holding as under: “12. We have heard both the parties and perused the records. As per the licence agreement granted to it by KoPT, the assessee is operating Berth no.12 and the profit of berth no.12 is eligible for 100% tax holiday. As per the agreement between the KOPT and the assessee, the assessee should obtain independent auditor’s report certifying the final royalty payment.
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Before obtaining the independent auditor’s report the assessee had paid royalty as per its own calculation based on the agreement. However, according to assessee, the computation of royalty by the independent auditor was very high. Therefore, a mutual settlement for this issue was attempted by the assessee with KOPT. But the said exercise failed, so the assessee invoked the arbitration clause and the matter is before the arbitrator. The amount for which the provision was made of Rs.2,76,60, 137/- which is the amount which the assessee needs to pay extra than what the assessee has paid to the KOPT. The Ld. CIT(A) has taken note of the fact that as per the agreement, the final royalty figure has to be computed by the independent auditor and according to the KOPT it is correct and final. So as per the agreement, the amount which the independent auditor has computed as the final royalty figure has crystallized and, therefore, is an allowable business expenditure. In case if the assessee is able to succeed in the arbitration proceedings then the assessee by virtue of the order gets any benefit in any subsequent assessment years by way of cessation or remission which has been allowed as a deduction in the present assessment year then the said amount can be brought for taxation by invoking the provision of Section 41(1) of the Act. 13. Therefore, in view of the above, we do not find any infirmity in the order passed by the Ld. CIT(A) and we are inclined to dismiss the appeal of the Revenue. In the result, this ground of appeal of the Revenue is dismissed.” 14. 7. The Revenue before us could not point out any change in facts and law therefore, respectfully following this order in the assessee’s own case and also relying on Supreme Court’s decision in the case of Bharat Earth Movers in 245 ITR 428 (SC) wherein it was held “if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date.” Therefore, we dismiss this ground of appeal of the Revenue and consequently Ground No.5 of the C.O of the assessee stands dismissed being infructuous.
Ground Nos.2 & 3 of the Revenue are against the action of the Ld. CIT(A) in deleting the disallowance made by the A.O u/s 40(a)(ia) of the Act amounting to Rs.1,57,12,909/- due to non-deduction of TDS on payment to M/s Tata Steel Ltd.
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
Brief facts of the case as noted by the A.O is that the A.O on perusal of the details furnished by the assessee noted that the assessee has claimed expenses amounting to Rs.1,57,12,909/- in its P&L A/c on account of ‘Fees related to Management Contracts’. According to him, it is evident that the assessee was required to deduct TDS on such payment and he asked the assessee to explain why TDS was not deducted on such payment. According to AO, in response the assessee stated that the aforementioned sum represented excess margin money received from M/s TATA Steel Ltd. which was returned back; and the assessee pointed out that since the income /receipt received from M/s TATA Steel Ltd. has already been credited as income in the P&L a/c and since this sum represented excess margin money paid to it, this reversal of Rs.1,57,12,909/- to M/s TATA Steel Ltd. cannot be subjected to tax. The A.O did not accept the submission of the assessee because according to him as the assessee has entered into a contract with M/s Tata Steel Ltd. and has itself characterized the expenses thereon as “Fees related to Management Contracts” this contention is not tenable. According to the A.O, since the assessee has not deducted TDS on sum paid, payment amounting to Rs.1,57,12,909/- was disallowed u/s 40(a)(ia) of the Act and made the addition.
Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the same by holding as under:
“6.2. 1have considered the submission of the AR of the appellant in the backdrop of the assessment order. The brief facts of the issue at hand are that there was a payment of 1,57,12,909/- made by the appellant on account of fees related to management contracts during the year under consideration. On being queried by the AO on the matter vis-à-vis non deduction of tax at source on such payment, the assessee stated that the aforesaid sum represented excess margin money received from TATA Steel Ltd. which was already credited in the P&L A/c and therefore any payment out of the said sum could not be subjected to tax with the further contention that payment out of an income could not be subjected to tax. However, the AO was not in agreement with the submission of the AR of the assessee and insisted that TDS was ought to have been effected on the above payment of 1,57,12,909/- (supra). On an overall analysis of the issue at hand, the salient points arising out of the submission of the AR (supra) could be summarized as follows: 1. That the Appellant had not received any service in respect of the amount of Rs.1,57,12,909 debited in the profit and loss account.
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
That an agreement subsisted between TATA Steel Ltd. (TSL) and the appellant (TMILL) to the effect that TMILL was entitled .to receive 'stipulated margin money' on the basis of projected volume of tonnage' 3. That on the facts and circumstances of the case (supra), the amount of 1.57 crores debited in the Profit and Loss Account was a mere reversal of irrecoverable fee which was recognized as income from port related services. That the learned A0 had failed to appreciate that TMILL had not received any such services from TSL during the year on which tax could have been deducted at source. 4 That the amount of Rs.1.57 crores was adjusted by TSL against the subsequent invoices raised by TMILL. Hence, TMILL had not separately refunded or paid such amount to TSL 5 That the accounting terminology used in the books of accounts cannot determine the real nature of the transaction and that it has been held that the treatment in books of accounts is not the only conclusive and determinative factor to determine the treatment for tax purpose. Case laws relevant to the issue are cited (supra). 6. That TDS was not applicable as the transaction was not in the nature of any payment as specified in the TDS provisions of the Act. I find from the points as delineated above, the nature of payment of Rs.1,57,12,909/- could not have attracted any provisions of the Act in the matter of TDS since the impugned payment related to a reversal of income as explained supra on which TDS provisions of the Act could not have been applied in any manner. On such facts of the matter, I find the A.O was on a wrong notion in applying the provisions of section 40(a)(ia) in making the impugned disallowance. In view of the foregoing, the A.O is directed to delete the impugned disallowance/addition of Rs.1,57,12,909/-. This ground is allowed.” 11. Aggrieved the Revenue is before us. We have heard both the parties and perused the records. We note that the assessee has debited a sum of Rs.1,57,12,909 relating to fees for management contracts (which is in the nature of cargo handling fees). The A.O has held that no satisfactory explanation was provided for non- deduction of TDS under section 194C of the Act on the said amount to M/s Tata Steel. Therefore, he disallowed this amount u/s 40(a)(ia) of the Act. According to the assessee, it did not receive any service in respect of the amount of Rs.1,57,12,909 debited in the profit and loss account and that the amount of Rs. 1.57 crores was in fact adjusted by Tata Steels against subsequent invoices raised by the assessee. Accordingly, the assessee claimed that TDS provisions are not applicable on the same.
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It was brought to our notice that the assessee (in short ‘TMILL) had entered into an agreement with Tata Steel Limited (‘TSL’) for handling tonnages for respective divisions of the TSL at different ports. In accordance with the terms of the agreement, TMILL was entitled to receive a 'stipulated margin money' on the basis of 'projected volume of tonnage'. As per the terms of the agreement at the end of every year, the actual volumes handled by TMILL will be reviewed. In case the aggregate actual volume handled by TMILL is different from the aggregate projected volume, then necessary adjustment to the extent of (+) / (-) 5% of overall projected margin would be affected by TSL. The Ld. AR Shri Nageswar Rao drew our attention to the relevant extract of the agreement along with the working of cargo handling fees placed at page no.165 to 168 of PB and according to him, any excess over such aggregated project volume is not recoverable from TSL. And it was brought to our notice by the Ld. AR , that for FY 2010-11 (i.e., relevant to AY 2011-12), TMILL was entitled to receive the stipulated margin / consideration of Rs 4.2 crores for handling tonnages of TSL (i.e. aggregate projected volume of 32,12,851 metric tonnes Rs 12.45 per metric tonne). However, according to the Ld. AR, TMILL had actually handled aggregate tonnage of 46,35,476 metric tons, resulting in the aggregate actual invoicing of Rs 5.77 crores. The said margin of Rs.5.77 crores was duly recognized as income in the books of accounts. Therefore, since the aggregate actual volume handled by TMILL was in excess of the aggregate projected volume, TMILL was entitled to receive only 5% of the projected aggregate margin in respect of the excess tonnage handled by it. The Ld. A.R drew our attention to the chart wherein the factual details are provided which is reproduced for ready reference as under:
Sl Item description Amount Particulars No. (Rs. In crores) A Aggregate margin/consideration for 4 The projected margin/consideration is projected volume determined on the basis of mutual negotiation between TSL and TMILL (i.e., 32,12,851 metric tons * Rs.12.45 per metric ton).
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B Stipulated aggregate margin money as per 4.2 As per the terms of the agreement, agreement [i.e., 105% of (A)] since the TMILL is entitled to receive maximum of volume handled is more than projected 5% of the aggregate projected margin for volume excess tonnage handled. Thus, TMILL is entitled to received maximum Cargo handling Fee of Rs.4.2 crores from TSL for FY 2010-11. C Aggregate margin for actual volume 5.77 TMILL has handled actual volume of handled by TMILL during FY 2010-11 46,35,476 metric tons during the year at different ports. The same has been recognized as income from port services in the financial statement. D Excess Margin Money debited as 1.57 The Cargo handling fee to the extent of management fees in the profit and loss (i.e., Rs 1.57 crores was not recoverable from account [.e., (C) less (B)] 5.77 TSL. Accordingly, the same was reversed less by debiting the Profit and Loss Account 4.2) by the said amount.
According to the Ld. AR, the amount of Rs 1.57 crores debited in the Profit and Loss Account is a mere reversal of irrecoverable fee which was recognized as income from port related services. According to him, the AO has failed to appreciate that TMILL has not received any such services from TSL during the year on which tax could be deducted at source. The Ld AR further submitted that TMILL provided such port related services to TSL on a regular basis. Thus, the amount of Rs 1.57 crores was adjusted by TSL against the subsequent invoices raised by the assessee (TMILL). Hence, TMILL has not separately refunded or paid such amount to TSL. Hence, the provisions relating to deduction of tax at source is not applicable on such adjustment / transaction and the Ld. AR drew our attention to page no.163,164 and 169 of the PB to support the aforesaid averments. We find that page no.163 of PB, the assessee had produced the written confirmation from TSL confirming that the surplus amount of Rs.157.3 lakhs in relation to cargo handling fees was paid/adjusted to TSL in accordance with the terms and conditions of the work order. We note that the TSL has confirmed the same at page 164 of the PB as under:
“Further the contract was reviewed based on actual volume handled and aggregate annual margin at the end of F.Y 2010-11. Accordingly, the surplus amount of Rs.1.57 crores received
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
by TM International Logistics Limited, beyond the maximum aggregate margin as stated above was paid/adjusted to Tata Steel Limited.”
And at Page no.169, the chart shows the project margin, maximum margin, actual margin and fees in relation to management contracts. We note that the amount of Rs 1.57 crores debited in the Profit and Loss Account is a mere reversal of irrecoverable fee/excess margin money. Thus we find that the Ld. CIT(A) has rightly reversed the action of the A.O and allowed the claim of the assessee in respect of Rs.1,57,12,909/- and it is a trite law that the accounting terminology used in the books of accounts cannot determine the nature of the transaction [Kedarnath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC)]. Thus we find no infirmity in the order of the Ld. CIT(A) and so we confirm the same.
Coming to the cross-objection of the assessee is concerned, we note that even though the assessee had raised two grounds of appeal initially, now before us the assessee has raised additional grounds vide letter dated on 04.03.2021. On a perusal of the same, it is noted that these are legal issues and therefore they are admitted.
Ground No.1 of the C.O of the assessee is against the action of the Ld. CIT(A) in respect to the disallowance made by the A.O u/s 14A read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as the Rules).
Brief facts of the case as noted by the A.O is that he noted that the value of investments as on 01.04.2010 and 31.03.2011 stood at Rs.39,04,43,958/- and Rs.41,76,71,872 respectively. The A.O noted that the total amount of tax exempt income from such investment earned by way of dividend amounts to Rs.58,53,717/-. The A.O asked the assessee to furnish details of expenses incurred on such investments for earning exempt income. The A.O noted that pursuant to the same, the assessee replied that the assessee company did not incur any expenditure for earning the said dividend income and therefore according to it no disallowance needs to be made in this regard. The A.O did not concur with the contention of the assessee since
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
according to him investments were managed and monitored to yield optimum returns to the company and as such the claim that no expenses were incurred in maintaining the same, is erroneous. The A.O noted that the assessee did not maintain any separate books of accounts for accounting for expenses incurred in relation to income not includible in its total income. Therefore according to AO, the amount of expenses actually incurred by the assessee to earn exempt income, cannot be ascertained from the assessee's books of accounts satisfactorily, therefore, he invoked section 14A of the Act read with Rule 8D and made disallowance as under:
“As per rule 8D(2)(ii) The average of value of investment is Rs.40,40,57,915/- as worked out earlier. In this view of the matter, the disallowance under rule 8D(2)(ii) is made as under: Disallowance u/r 8D(2)(iii) = 0.5% of the average of value of investment =0.5% of Rs.40,40,57,915 = Rs.20,20,290/- Therefore, Rs.20,20,290/- is added backk u/s 14A read with rule 8D (2) in computing the income under normal provisions as well as in computing book profit u/s 115JB.”
Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who gave partial relief to the assessee by holding as under:
“4.1. I have considered the submission of the AR of the appellant in the backdrop of the assessment order. The brief facts of the matter are that since the appellant had earned exempt dividend income of Rs.58,53,717/-during the relevant year, the A.O found it fit to make a disallowance of Rs.20,20,290/- u/s 14A r.w. Rule 8D(2)(ii). I find that against the earning of exempt income, the appellant had not made any suo moto disallowance which I find to be not correct. The Apex Court in the case of MAXOPP INVESTMENTS LTD. has held that if expenditure is incurred on earning the dividend income that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. The dominant purpose for which the investment into shares is made by an assessee may not be relevant. Fact remains that such dividend income is non-taxable and if expenditure is incurred on earning the dividend income that much of the expenditure which is attributable to the dividend income has to be disallowed. I find the AO has rightly made disallowance under the third limb of Rule 8D(2). However, It is well settled that as per the third limb of Rule 8D(2), 0.5% of investment in shares should be Considered only on the dividend yielding scripts. In this regard the AO is directed to consider only those investments in shares which yielded exempt dividend income for working out the disallowance under the third limb of Rule 8D(2) of the I.T. Rules, 1962. In this regard the AR is also directed to cooperate with the AO in the matter. With regard to the adjustment of disallowance made u/s
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14A in computing the income u/s 115JB, I find that such adjustment cannot be made as ruled by various judicial decisions. From a plain reading of the provisions of section 115JB, (book profit), there is no scope of making any adjustment on account of disallowance made u/s 14A of the Act. Therefore, the addition in this regard is directed to be deleted. These grounds are treated as partly allowed.” 19. Aggrieved the assessee is before us. We have heard both the parties and persued the records. We note that this issue has already come up before this Tribunal in assessee’s own case for A.Y 2009-10 wherein the Tribunal has held as under:
“19. We have heard both the parties and persued the records. We note that the assessee received a sum of Rs.66,40,434/- as dividend income which has been claimed as exempt by the assessee. The A.O being not satisfied with the reply of the assessee that no expenditure was incurred to earn the dividend income applied Rule 8D(iii) and disallowed 0.5% of average investment value of Rs.28,31,99,120/-. On appeal the Ld. CIT(A) confirmed the disallowance by simply stating that Rule 8D is applicable from A.Y. 2009-10. The contention of the assessee is that the computation of Rule 8D(ii) can be done only by taking into consideration the investment which has given rise to the exempt income, in other words the assessee's contention is that only the investment made on dividend bearing shares can only attract Rule 8D(ii) and for the said proposition has relied on the order of the co-ordinate bench in REI Agro Ltd. Vs. DCIT 144 ITD 141 (Cal). We find force in the contention of the Ld. AR and we are inclined to accept the same and, therefore, we set aside the order of the Ld. CIT(A) and remit the matter back to the file of the AO to compute Rule 8D(ii) only in respect of the investment made by assessee in shares which resulted in dividend in the instant assessment year. With the aforesaid direction we remand the matter back to the file of the AO and the AO is directed to compute the disallowance of 0.5 percent as directed above.” 20. In the light of the aforesaid decision of the Tribunal on the same issue, we find no infirmity in the order of the Ld. CIT(A). Therefore we dismiss this ground of C.O of the assessee.
Ground No.2 of C.O reads as under:
“2. That on the facts and circumstances of the case, and in law, the learned A.O be directed to allow the deduction of education cess on the income tax paid given the fact that the same is not hit by the provisions of section 40(a)(ii) of the Act, and hence is an allowable deduction.” 22. The Ld. AR of the assessee contended that the Ground No.2,3&4 are similar in nature and can be disposed of together.
The additional grounds of in C.O are as under:
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
“Ground 3.1: That, on the facts and in the circumstances of the case and in law, the learned Assessing Officer (‘AO’) be directed to recompute the DDT liability by considering the benefit of applicable DTAA between India - Netherlands and India - Germany respectively qua the rate of tax (i.e. 10%) towards payment of dividend to the non-resident shareholders namely NYK Holding Europe B.V., Netherlands and IQ Martrade Holding Und Management GmbH, Germany. Ground 3.2: That, on the facts and in the circumstances of the case and in law, the Assessee further contends that lower rate of taxability at 5% of dividend income shall apply on the dividends paid to NYK Holding Europe B.V. Netherlands, by virtue of the Most Favoured Nation (‘MFN’) clause available in the Protocol to the DTAA between India and Netherland, as such lower rate has been agreed by the Government of India with another member of the OECD i.e. Slovenia, at a subsequent date. Ground 3.3: That, on the facts and in the circumstances of the case and in law, the Assessee contends that in terms of section 90(2) read with section 10(34) of the Act, the dividend income being taxable in the hands of the non-resident, it could not be subjected to a rate in excess of the rate prescribed under the DTAA’s. Ground 3.4: That as per the provisions of Section 237 of the Act read with Article 265 of the Constitution of India, only legitimate tax could have been retained by the Government. Ground 3.5: That the Learned AO be directed to extend the benefit of applicable DTAAs qua the rate of tax towards payment of dividend to the non-resident shareholders and grant refund of the excess tax deposited. Deduction of education cess on DDT paid for the AY as allowable expenditure Ground 4.1: That on the facts and in the circumstances of the case and in law, the Learned AO be directed to allow the deduction of education cess on the DDT paid in respect of resident shareholders, given the fact that the same was not hit by the provisions of section 40(a)(ii) of the Act and hence is an allowable deduction. Ground 4.2: Without prejudice to Ground No. 3 above, that on the facts and in the circumstances of the case and in law, the Learned AO be directed to allow the deduction of education cess on the DDT paid in respect of non-resident shareholders, given the fact that the same was not hit by the provisions of section 40(a)(ii) of the Act and hence is an allowable deduction.”
The Ground No.2 in C.O raised by the assessee is in respect of deduction of education cess on income-tax paid by the assessee which it claims as an allowable expenditure. We note that this issue relating to education cess as to whether it is an allowable expenditure or not is no longer res-integra and has come up before this Tribunal in the case of Reckitt Benckiser (I) Pvt. Ltd. vs. DCIT in ITA
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No.404/Kol/2015 & ITA No.625/Kol/2016 decided on 17/06/2020 wherein this Tribunal has dealt with this issue as under:
“55. The second additional ground raised by the assessee reads as follows:
"2.Deduction of education cess on income tax paid by the assessee is allowable expenditure. This ground relates to A.Y 2011-12."
We note that issue raised by the assessee in this additional ground is no longer res- integra. Ld. Counsel of the assessee submitted that education cess is not tax and hence not disallowable u/s 40(a)(ii) of the Act. We note that the CBDT Circular No. 91/58/66 - ITJ(19) dated 18-05-1967, wherein it has been clarified that the effect of omission of the word 'cess' from Sec. 40(a)(ii) of the Act is that only taxes paid are to be disallowed and not cess. Relevant extract of circular is as under:-
"Recently a case has come to the notice of the Board where the ITO has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of s. 10(4) of the old Act and s. 40(a)(ii) of the new Act. The view of the ITO is not correct. Clause 40(a) (ii) of the IT 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 ITOs so that further litigation on this account may be avoided"
We also rely on the judgment of Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. JCIT (ITA No. 52/2018) which after taking into account aforementioned CBDT circular held that Sec. 40(a)(ii) applies only to taxes and not to education cess. Relevant extract of the decision is reproduced for ease of reference:-
"13. On the third issue in appeal no. 52/2018, in view of the circular of CBDT where word "Cess" is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee."
We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below:
(i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) -
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
"The assessee's additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317 u/s 37 of the Act. We note that hon'ble Rajasthan high court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue's contentions supporting the impugned disallowance. The assessee's instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee's appeal I.T.A. No. 685/Ko/2014 is partly accepted in above terms.
(ii).Peerless General Finance & Investment Co. Ltd. -vs. - DCIT (ITA No. 937/Kol/2018)-
"37. Additional ground raised by the assessee in ITA No.937/Kol/2018 for A.Y.201011 reads as under:"That on the facts and in the circumstances of the case, the authorities below erred in not allowing deduction U/s 37(1) of the Income Tax Act,1961, on account of Education Cesses paid by the assessee while arriving at the assessed income for the year under appeal. "
After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present ground of appeal is no longer res integra. The education cess being not 'income tax' is allowable as deduction under section 37 (1) of the Act. For this, we rely on the judgment of the coordinate Bench of IT AT Kolkata in the case of ITC Limited, ITA No.685/Kol/2014, order dated 27.11.2018, wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the assessing officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. "
(iii)Tega Industries -vs.- ACIT (ITA no. 404/Kol/2017)-
"We further to notice that assessee has raised an identical additional ground in both cases seeking to claim education cess on provision for Income-tax amount of Rs. 71,65,049/- and Rs. 77,76,699 (assessment year wise); respectively as allowable in computing total income other than MAT u/s. 115JB of the Act. Hon'ble Apex Court's land mark decision National Thermal Power Corporation Ltd (NTPC) V/s. CIT (1998) 229 ITR 383 (SC) as considered by this tribunal's Special Bench order M/s. All Cargo Global Logistics Ltd V/s. DCIT (12) 137 1TD 26 (Mum.) settles the law that we an very well entertain such a legal question in order to determine the correct tax liability when all the relevant facts form part of records. We thus allow assessee's additional ground to be raised.
Coming to merits of the hon'ble Rajasthan high court's decision in Chambal Fertilisers& Chemicals Limited V/s. JCIT(D.B Income Tax Appeal No. 52/2018, dated 31-07-2018 taking note of CBDT's Circular No. 91/58/66 dated 18-05-1965 as well as co-ordinate bench's order in ITC Limited V/s. ACIT( ITA No. 685/Kol/2014 dated 27- 11- 2018 hold that such a claim of education cess is very much allowable in computing total income under the provisions of the Act."
The Ld Departmental Representative relied on the earlier decision of ITAT dated 27- 02- 2019, wherein this Tribunal had disallowed the claim on the basis of two contentions: (i) Education cess is an additional surcharge and hence forms of income tax and (ii) Decision of
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
Kalimati Investment Company Ltd. -vs.- ITO (ITA No.2706,4508/M/2010,2552,2553/M/2011) and Sesa Goa Ltd. -vs.- JCIT (ITA No. 72/PNJ/2012) squarely applicable against the assessee.
We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. This additional ground raised by the assessee is allowed.”
Respectfully following the decision of this Tribunal in the case of Reckitt Benckiser (I) Pvt. Ltd. vs. DCIT (supra), we direct the A.O to allow the claim in respect of the education cess while computing the total income of the assessee. Ground No.2 of the C.O of the assessee is allowed.
Ground No.3 (of additional ground) is for refund for dividend distribution tax paid in respect of non-resident shareholders. The submission of the assessee is as under:
“During the Financial Year 2010-11, relevant to the captioned AY 2011-12, the company had declared a final dividend of INR 1,80,00,000 and paid a corresponding Dividend Distribution Tax (DDT) of INR 29,89,575 at the rate of 16.6%% (including surcharge of 7.5% and cess of 3% on the base rate of 15% as per section 115-O of the Income Tax Act, 1961). The same was deposited in the government exchequer on 06 August 2010. As on the date of declaration of dividend, i.e., 27 July 2010, the shareholding of the Assessee was as follows: SI. Name of Shareholder Holding Percentage Corresponding Dividend No. Paid in FY 2010-11 (INR) A B C [INR 1,80,00,000*C] (i) Tata Steel Limited, India 51% INR 91,80,000 (ii) NYK Holding Europe BV., 26% INR 46,80,000 Netherlands (iii) IQ Martrade Holding Und 23% INR 41,40,000 Management GmbH, Germany Total 100% INR 1,80,00,000
While calculating the DDT liability in respect of non-resident shareholders [i.e., Sl. (i) and (i) above], the company has inadvertently considered the rate of tax as per section 115-O of the Act, instead of the rates prescribed under the relevant articles of the corresponding Double Tax Avoidance Agreements (‘DTAAs’) entered into between the Government of India and Netherlands / Germany, respectively.”
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
Since this issue has not been considered by the AO, therefore in the light of the aforesaid submission of the assessee, we are of the view that this issue should be remanded to the file of the A.O for factual verification and adjudication of the claim as per law. The assessee is directed to file before the A.O all the document regarding amount of dividend paid, copy of agreement, other relevant documents as required by the A.O to adjudicate the issue. We direct the A.O to examine the relevant ‘double taxation avoidance agreement’ in respect to the payment of dividend to the shareholders and adjudicate the issue in accordance with law. For statistical purposes, this additional grounds raised by the assessee in C.O is allowed.
Ground No.4 is in respect of deduction of education cess on DDT paid which the assessee claims as allowable expenditure. The prayer of the assessee is that to allow the deduction of education cess on DDT paid in respect of the non-resident shareholders since it was not hit by provision of section 40(a)(ii) of the Act and hence it is an allowable deduction. This issue we have dealt with while adjudicating ground no. 2 of the CO of the assessee. So on the same reasoning mutatis mutandis this ground is allowed.
In the result, the appeal of the Revenue is dismissed and the cross objection of the assessee is partly allowed for statistical purpose.
Order is pronounced in the open court on 24th March, 2021.
Sd/- Sd/- (J. Sudharkar Reddy) (A. T. Varkey) Accountant Member Judicial Member
Dated: 24.03.2021 RS
I.T.A. No.2567/Kol/2019 C.O. 12/Kol/2020 Assessment Year: 2011-12 M/s TM International Logistics Ltd., Kolkata
Copy of the order forwarded to: 1. Appellant- DCIT, Circle-8(1), Kolkata 2. Respondent – M/s TM International Logistics Ltd., Kolkata, Tata Centre, 43, J.L. Nehru Road, Kolkata – 700071. 3. The CIT(A)- , Kolkata (sent through e-mail) 4. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail)
//True Copy// By Order
Assistant Registrar ITAT, Kolkata Benches, Kolkata