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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ NEW DLEHI
Before: SHRI O.P. KANT & SHRI K. NARASIMHA CHARY
PER K. NARASIMHA CHARY, J.M. This appeal by the assessee for the assessment year 2016-17 is directed against the assessment order dated 31.03.2021 in pursuance to the directions of ld. Dispute Resolution Penal-2, New Delhi (DRP) dated 16.11.2020.
Assessee is a company engaged in the business of developing and exporting software to its holding company, Cadence Inc., USA and providing technical support and marketing related services to customers of Cadence (Ireland) Ltd. Under the scheme of amalgamation approved by Hon’ble High Court of Karnataka by order dated 21.04.2016, three companies, namely, Cadence AMS Design Pvt. Ltd., Denali Design System Pvt. Ltd. and Tensilica Technologies India Pvt. Ltd. were amalgamated into the assessee and all assets and liabilities of the said companies were transferred to the assessee. For the assessment year 2016-17, assessee filed return of income on 29.11.2016 declaring income of Rs.1,10,09,38,770/- and in view of international transactions entered into by the assessee with their Associate Enterprises (AEs), ld. Assessing Officer referred the determination of Arm’s Length Price to the Transfer Pricing Officer (TPO). Ld. TPO suggested adjustment of Rs.24,06,976/- in respect of marketing support services and Rs.75,60,525/- in respect of interest on receivables. When the assessee filed objections before the ld. DRP, the DRP gave certain directions, in view of which, the addition was reduced to Rs.10,86,422/-. Ld. Assessing Officer also disallowed a sum of Rs.1,01,03,561/- on account of provision for leave encashment paid and on this aspect, ld. DRP directed the Assessing Officer to verify the claim of the assessee as to whether it has paid such amount during the year under consideration and on verification, ld. Assessing Officer allowed the claim. On the same line, following the DRP directions, ld. Assessing Officer allowed the MAT credit. Ld. Assessing Officer, however, disallowed a sum of Rs.1,75,88,014/- on account of bad debts by observing that pursuant to DRP directions, the claim was verified and it was found that the assessee had not fulfilled the conditions laid down u/s. 36(2) of the Act. Ld. Assessing Officer, therefore, by order dated 31.03.2021 made disallowance to the tune of Rs.10,86,422/- on account of transfer pricing adjustment and disallowed bad debts to the tune of Rs.1,78,88,014/-.
Assessee is, therefore, before us in this appeal challenging the final assessment order on as many as nine grounds. Grounds Nos. 1 & 2 are general in nature and ground No. 9 is consequential in nature and they do not require any adjudication. Ground No. 3 is in respect of disallowance of bad debt written off, ground No. 4 to 6 relate to incorrect assessed income, ground No. 7 relates to education cess and ground No. 8 is in respect of transfer pricing adjustment. We shall now deal with these issues under dispute.
Coming to bad debts written off, ld. Assessing Officer’s contention is that such bad debts relate to the amalgamating company, i.e., Cadence AMS Design India Pvt. Ltd. and the provision for doubtful debts was to be allowed only in respect of the assessee and none else.
Ld. AR placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs. T. Veerabhadra Rao, 155 ITR 152 (SC) and of Hon’ble Gujrat High Court in CIT vs. Sambhav Media Ltd., 33 taxmann.com 363(Guj. HC) for the principle that the successor entity is entitled to claim deduction in respect of bad debts relating to the predecessor entity before amalgamation. Hon’ble Gujrat High Court held that where the amalgamated company carried certain doubtful debts till the date of amalgamation, claims for bad debts subsequent to amalgamation is allowable in the hands of transferee-company. It is, therefore, clear that the bad debts relating to the amalgamating company, if are written off by the amalgamated company, the amalgamated company is entitled to claim deduction in respect of the same.
It is not in dispute that the ld. DRP directed the ld. Assessing Officer to verify the claim of the assessee regarding allowance for provision for doubtful debts in the case of amalgamating company in the earlier years and to verify the allowability of the same in the hands of the assessee in terms of the conditions laid down in section 36(2). Ld. Assessing Officer, however, apart from stating that income was booked in the account of another entity, i.e., Cadence AMS Design India Pvt. Ltd., which is not the assessee, does not give any reason, whatsoever, for making the relevant disallowance. We, therefore, direct the ld. Assessing Officer to verify the claim of the assessee regarding the disallowance of the provision for doubtful debts in the case of amalgamating company in the earlier years and if he finds them to be proper, allow the deduction in the hands of the amalgamated company. This ground is, accordingly, allowed for statistical purposes.
Now coming to ground No. 4 to 6, it is submitted by the ld. AR that in respect of grievance of assessee under grounds Nos. 4 to 6, a rectification application was filed vide email dated 23.04.2021 alongwith follow up/reminders dated 08.07.2021 and 13.07.2021, but the ld. Assessing Officer has not attended the matter so far. Ld. AR prayed that directions may be given to the ld. Assessing Officer to dispose of the rectification application on due verification of the claim of the assessee in respect of the assessment of total income, non-grant of MAT credit and short grant of advance tax and TDS. Ld. DR fairly concedes that the matter may be sent back to the ld. Assessing Officer for taking a view while disposing of the rectification application. We, therefore, direct the ld. Assessing Officer to consider the grievance of the assessee in respect of the assessment of income at Rs.1,15,72,72,280/- in the computation sheet instead of Rs.1,11,96,13,210/-; in respect of grant of MAT credit; and in respect of short grant of advance tax and TDS. Accordingly, grounds Nos. 4 to 6 are allowed for statistical purposes.
Now, coming to ground No. 7, it relates to the claim of the assessee for deduction of education cess to the tune of Rs.97,09,002/-. Ld. AR fairly submits that this ground was agitated neither before the Assessing Officer nor before ld. DRP at any stage of the proceedings. However, ld. AR submits that in view of the decisions of Hon’ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. JCIT (2019) 107 taxmann.com 484 (Raj), Bombay High Court in the case of Sesa Goa Ltd. vs. JCIT, 117 taxmann.com 96 and followed in many cases, the assessee is entitled to claim deduction of education cess.
Ld. DR on this aspect submits that there is a difference in the cess which is levied under the Income-tax Act and other enactments, inasmuch as, the cess levied under Income-tax Act partakes the character of Income-tax itself and therefore, it is not allowable as deduction, whereas the cess levied under other enactments is in respect of some services rendered by the Government and therefore, it stands on a different footings and allowable as a deduction. He places reliance on the decision of Hon’ble Apex Court in the case of CIT vs. K. Srinivasan, AIR 1972-SC-491 in support of his contention that the cess levied under the IT Act forms part of the Income tax itself. He submitted that the decision of Hon’ble Supreme Court is not considered by the High Court in the case of Chambal Fertilizers and Chemicals Ltd. (supra) and Sesa Goa Ltd. (supra) and therefore, he addresses the Bench to follow the decision of Hon’ble Supreme Court.
Be that as it may, it remains an undisputed fact that the assessee does not raise this issue at any stage before the authorities below. We, therefore, find force in the arguments of the ld. AR that this issue may be restored to the file of ld. Assessing Officer to take a view after giving opportunity to the assessee. Needless to say, the Assessing Officer shall give an opportunity to the assessee and take a view according to law. This ground is, accordingly, allowed for statistical purposes.
Now coming to ground No. 8, it relates to the bench marking of the interest outstanding on receivables. Ld. AR submits that this issue is covered by the decision of Hon’ble jurisdictional High Court in the case of PCIT vs. Kusum Healthcare Pvt. Ltd. order dated 25.04.2017 in ITA No. 765/2016. Apart from that he submits that the assessee entered into Bilateral Advance Pricing Agreement(BAPA) with CBDT on 03.03.2021 which covers the present assessment year and certain transactions (software development segment) and has already filed its modified return under section 92CD(1) on 28.06.2021. He submitted that the directions of ld. DRP were to calculate interest on net basis whereas the ld. TPO has ignored the amounts payable while doing the computation and if the net receivables are considered then no addition would arise. In these circumstances, ld. AR prayed that the issue may be restored to the file of ld. Assessing Officer to consider the same in the light of decision of Hon’ble jurisdictional High Court as well as BAPA.
Learned DR fairly concedes the request of the assessee. We, therefore, set aside the impugned assessment order and direct the ld. Assessing Officer to take plausible view in compliance with DRP directions in the light of the decision of Hon’ble Delhi High Court in CIT vs. Kusum Health care (supra) and also BAPA.
In the result, the appeal is allowed for statistical purposes.