Income Tax Appellate Tribunal - Delhi
Exlservice.Com (India) P.Ltd, New ... vs Dcit Ltu, Circle-1, New Delhi on 8 March, 2021
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IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI 'I-1' BENCH,
NEW DELHI [THROUGH VIDEO CONFERENCE]
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND
MS. SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 8452/DEL/2019 [A.Y 2015-16]
ITA No. 5435/DEL/2017 [A.Y 2012-13]
ITA No. 5436/DEL/2017 [A.Y 2013-14]
ExlService.com India Pvt Ltd Vs. The A.C.I.T, LTU
414, 4th Floor, Plot No. 10 & 11 Circle - 1
DLF Jasola Tower -B, DDA New Delhi
District Centre, New Delhi
PAN: AAACE 5174 C
[Appellant] [Respondent]
Assessee by : Shri Ajay Vohra, Sr. Adv
Shri Neeraj Jain, Adv
Revenue by : Shri Surender Pal, CIT-DR
Date of Hearing : 02.03.2021
Date of Pronouncement : 08.03.2021
ORDER
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
ITA No. 5435 and 5436/DEL/2012 are appeals by the assessee preferred against the orders of the ld. CIT(A)-22, New Delhi dated 16.06.2017 for A.Y 2012-13 and 2013-14. ITA No. 8452/DEL/2019 is 2 appeal by the assessee preferred against the order dated 26.09.2019 for A.Y 2015-16 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] pertaining to A.Y 2013-14.
2. At the very outset, the ld. DR strongly objected for hearing of the appeal in ITA No. 5435 and 5436/DEL/2012 claiming that this is not the bench to consider these appeals and should be heard by the regular bench assigned to hear such appeals.
3. We do not find any merit in this objection of the ld. DR. The Tribunal, while granting stay in appeal in ITA No. 8452/DEL/2019 in SA No. 1001/DEL/2019 order dated 01.11.2019 had made it very clear that other appeals of the assessee on similar issue have been fixed before the bench on the same date.
4. Since common grounds are involved in the captioned appeals, they were heard together and are being disposed off by this common order for the sake of convenience and brevity.
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5. Ground No. 1 in all the appeals is of general in nature and needs no adjudication.
6. Common Ground Nos. 2 to 2.6 in all the appeals relate to the disallowance of depreciation on goodwill.
7. Briefly stated, the facts of this quarrel are that during the A.Y. 2010-11, the appellant entered into an Asset Purchase Agreement [APA] on 04.11.2009 and subsequent amendment thereto on 01.03.2010 with American Express India Pvt Ltd to acquire Global Travel Service Centre as a going concern for a lumpsum consideration on slump sale basis of Rs. 1350 million.
8. The afore-stated purchase consideration was allocated to identifiable assets and liabilities based on their book value and the difference between the purchase and net value of acquired assests was recognised as 'goodwill' of Rs. 76,97,89,365/- in the books of the appellant in A.Y 2012-13.
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9. The Assessing Officer disallowed the claim of depreciation stating that in A.Y 2010-11, though the DRP has allowed the claim of depreciation, the department has filed an appeal before the Tribunal and further, the assessee has failed to establish its claim of the parameters discussed in the assessment order. The main reason for disallowance of depreciation is that the assessee has not shown or established any such intangible assets or intellectual assets recognised in the books of accounts of the transferor. The Assessing Officer further observed that there is no question of transfer of intangible or intellectual assets by the transferor to the transferee as both the parties have agreed that transfer of assets on going concern basis on the condition that the assessee has agreed to provide service to the transferor for which the assessee will receive consideration on cost plus mark up basis.
10. The Assessing Officer further observed that the assessee has not been able to provide expense acquisition of goodwill and the price for which that is purchased. The Assessing Officer observed that the purchase price of the transaction was approximately Rs. 1350 million which was allocated to identifiable assets and liabilities based on their book value and difference has been recognised as good will at Rs. 769 5 million. According to the Assessing Officer, purchase consideration includes Rs. 476 million in respect of customer relationship has been held for sale to Exl Service Holding Inc, the ultimate parent company which has been disclosed under "Current Assets".
11. Disallowance made by the Assessing Officer was confirmed by the ld. CIT(A). The relevant findings of the ld. CIT(A) read as under:
"From a perusal of the assessment order, it is noticed that the A.O. has t held that the deprecation is not to be allowed on goodwill. The A.O. has disallowed depreciation on the ground that the assessee has failed to establish that any such intangible asset or intellectual asset was acquired by it. Reason for disallowance of depreciation was failure of the assessee to establish the existence of goodwill and the price / valuation of the same. The assessment order on the Page 19/20 mentions that the purchase price of the undertakings was approximately INR 1350 million out of which the goodwill was recognized at 769 million INR. The purchase consideration included 476 million INR in respect of the customer relationships, which had been sold to M/s Exl Services holdings Inc, the parent company. Though, the AO has referred to the findings in the assessment order of the A.Y. 2010-11 and has also mentioned the pendency of the appeal of the Revenue before the ITAT as one of the reasons for the disallowance, the main reason for disallowance was that the appellant actually did not have any 6 goodwill and the valuation of the goodwill, if any, as claimed by the appellant was not correct.
8.2 It was in this background that the matter was further investigated and it was learnt that the facts before Hon'ble ITAT / DRP in A.Y. 2010-11, which formed the basis of the decision of DRP/ITAT in A.Y. 2010-11 were slightly different from the actual facts in A.Y. 2011-12 and 2012-13. The DRP's in its order for A.Y. 2011-12 has simply followed its decision for A.Y. 2010-11 and the order of the Hon'ble ITAT for A.Y. 2010-11 is based on the facts of A.Y. 2010-11 as presented before the Hon'ble ITAT.
12. The ld. CIT(A) further supported the disallowance by observing as under:
"There is no reference to transfer of intangibles for INR 476 million to the parent company of the appellant in above para. In A.Y. 2011-12, the assessee transferred the customer contracts of the business undertaking purchased by it to its holding company for 476 million INR vide invoice dated 15.10.2010. In the report u/s 92E attachment III for A.Y. 2011-12 this amount has been mentioned as reimbursement for customer relationship benefit to the company. The notes mentioned that the reimbursement has been made at the cost and no bench marking is required. For reference the attachment III of the transfer pricing report for A.Y. 2011-12 alongwith notes 4, 8 and 10 are reproduced herein under.7
"EXLSERVICE.COM (INDIA) PRIVATE LIMITED DETAILS IN RESPECT OF EACH ASSOCIATED ENTERPRISE AND EACH INTERNATIONAL TRANSACTION OR CLASS OF INTERNATIONAL TRANSACTIONS NOTSPECIFCALLY REFERREED ANYWHERE ELSE DURING THE YEAR ENDED MARCH 31, 2011 Total amount received or receivable for services provided Name & address Description of As per As Method used of the associated services books of computed for determining enterprise provided/ availed account by the the arm's length to /from the (Rs.) assessee price.
associated --- ------- having
price (Rs.)
Exl Service Reimbursement No
Holdings, Inc., US, of expenses benchmarking
280 Park Avenue, received by the 321,754,4
required (See
38th Floor New company 85 321,754,485 Note 4, 8 and 10
York,
Exl NY 10017
Service Reimbursement in
No attachment
Holdings, Inc., US, for customer benchmarking
280 Park Avenue, relationship 476,000,0
required (See
38th Floor New benefits to the 00 476,000,000 Note 4, 8 and 10
York,
Fxl NY 10017
Service company.
Reimbursement in
No attachment
Holdings, Inc., US, of perquisite tax benchmarking
280 Park Avenue, to the company required (See
38th Floor New on employee Note 4, 8 and 10
York, NY 10017 stock options in attachment
4. The company has incurred certain expenses on behalf of its associated enterprises and recovered the same from the 8 associated enterprises at cost. The company believes that the function performed by the company relates to facilitating of payment on behalf of associated enterprises. Accordingly, the 'cost only' reimbursement by associated enterprises to the company could be regarded as the arm's price.
8. In the various attachments of this report, the total amount paid/received or payable/receivable as per books of the company is the total amount for each class of transactions for assessment year 2011-12, listed for each associated enterprises.
9. In determining the operating margin for each class of international transactions, the indirect costs have been allocated based on appropriate assumptions as determined by the management.
10. The company has certified that there are no transactions, other than those disclosed in attachments II and III that have been made with associated enterprises or persons specified in attachment I."
10.2 In the order u/s 92CA(3) for A.Y. 2011-12 there is no discussion of this transaction except reproduction of its description, apparently on the presumption that it is reimbursement of cost of customer relationship benefit to the company without any mark up 10.3 As is evident from the above discussion and record of appellate proceedings (supra) the appellant did not explain in explicit terms the working of the goodwill in the assessment / 9 appellate proceedings of A.Y. 2010-11. As per the said working out of the total consideration of 1334.15 million INR paid by the appellant in the A.Y. 2010-11, 476 million INR was to be received from the parent company leaving a balance consideration of 858.15 million INR. The net asset value of the undertaking taken over was worked out at 88.36 million INR leaving a difference of 769.79 million INR as the difference being the value of the intangibles.
10.4 This transaction of INR 476 million has taken place in A.Y. 2011-12 and not in A.Y. 2010-11. It is claimed that this amount was clubbed in current assets in A.Y. 2010-11. But the invoice was raised in A.Y. 2011-12. The agreement between appellant and its holding company for the amount of 476 million INR has not been filed inspite of several opportunities to ascertain the date of agreement and the basis of valuation of intellectual property transferred. In the case of Smifs Securities Ltd. (supra), the issue involved was whether goodwill is an asset u/s 32 and not the valuation aspect. Moreover, the difference of slump sale consideration and cost of assets was taken as the value of goodwill by the assessee in that case. The same issue was involved in the case of Areva T&D India Ltd. (Supra). The Hon'ble ITAT's decision in A.Y. 2010-11 is based mainly on these two decisions. 10.5 The corresponding amount of intangibles in the case of appellant is INR 1245.79 million and not INR 1245.79 million INR. The intangible assets M/s EXL Service.Com (India) Pvt. Ltd. Appeal No. 18/16-17, AY-2012-13 acquired for INR 1334.15 million were 10 transferred in A.Y. 2011-12 for INR 476 million INR. No intangible assets remained with appellant after that but facts were presented in a manner, which conveyed as if the intangibles acquired in A.Y. 2010-11, were of 769.79 million INR only. Though, it is claimed that the amount of INR 476 million was in current assets in A.Y. 2010-11 (surprising without raising any invoice), this fact was never explicitly disclosed in A.Y. 2010-11. In A.Y. 2012-13, the issue involved in whether any goodwill remained after the said transfer. "
13. Before us, the ld. counsel for the assessee vehemently stated that the disallowance of depreciation on good will made by the Assessing Officer in draft assessment order for A.Y 2010-11 was deleted by the DRP which was upheld by the Tribunal in ITA No. 302/DEL/2015. It is the say of the ld. counsel for the assessee that the ld. CIT(A) failed to give credence to the fact that the business was acquired on slump sale basis for Rs. 1334.15 million and out of the said total consideration, Rs. 476 million was to be received by the assessee from its parent company.
14. The ld. counsel for the assessee drew our attention to the relevant part of the financial statements of the assessee and pointed out that under Schedule IX of the financial statement for the year 11 ending on 31.03.2010, an amount of Rs. 476 million has been shown under "Other Current Assets" to be read alongwith Note 4 to Schedule 18 to the financial statement. The ld. counsel for the assessee stated that this amount has been received by the assessee in the next F.Y.
15. Per contra, the ld. DR strongly supported the findings of the ld. CIT(A) and read the relevant observations of the first appellate authority.
16. We have given thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that this is not the initial year of claim of depreciation. In our considered opinion, unless the claim is disturbed in the initial year of claim, subsequent years cannot be disturbed.
17. Most importantly, in earlier A.Ys, claim of depreciation has been allowed by the Tribunal in ITA Nos. 1482/DEL/2016 and 1708/DEL/2016. The relevant findings of the co-ordinate bench read as under:12
" 38. Ground number 2 of the appeal of the AO is against the disallowance of depreciation on goodwill amounting to 168,391,424 which resulted into on account of an asset purchase agreement dated 4/11/2009 and its subsequent amendment with American Express India private limited to acquire the global travel service centre as a going concern for a lump sum consideration. The fact shows that during the assessment year 2000 - 11 the assessee entered into an asset purchase agreement with American Express India private limited to acquire the global travel service centre as a going concern for a lump sum consideration of 1 350 million. The aforesaid consideration was allocated to an identifiable asset and liability based on the book value, and the difference between the purchase price and the net asset value of acquired asset was recognized as a goodwill amounting to 769,789,365 in the books of the assessee. It is required to be noted that this is not the first year of the claim of depreciation on goodwill. In fact, this is the second year of depreciation claimed by the assessee on the goodwill. The learned assessing officer disallowed the depreciation, which was deleted by the learned dispute resolution panel. It is apparent that in assessee's own case for assessment year 2010 - 11 in ITA number 302/del/2015 the coordinate bench relying on the decision of the honourable Supreme Court in CIT versus Smif securities Ltd (2012) 348 ITR 302 and the decision of the honourable Delhi High Court in case of Areva T & D India Ltd versus Deputy Commissioner Of Income Tax (2012) 345 ITR 421 held that depreciation was admissible on goodwill amounting to 769,789,365 and dismissed the appeal of the revenue. The learned dispute resolution panel deleted the disallowance following its own 13 direction issued in assessment year 2010 - 11. Therefore, the learned assessing officer is in appeal before us.
39. The learned departmental representative payment please submitted that for the purpose of the claim of the depreciation merely an accounting entry could not suffice. He submitted that there has to be an asset available with the assessee, which should be owned by the assessee. He submitted that it is merely an accounting entry which does not result into an asset automatically. He relied upon the order of the learned assessing officer.
40. The learned authorised representative submitted that the issue squarely covered in favour of the assessee by the decision of the coordinate bench for assessment year 2000 - 11 in ITA number 302/del/2015 at para number 74 of the order.
41. We have carefully considered the rival contention and perused the orders of the lower authorities. As stated by us earlier that this issue is not a new as the claim of the depreciation on the goodwill has already been allowed to the assessee in assessment year 2010 - 11 by the coordinate bench vide para"
18. It can be seen from the findings of the co-ordinate bench that it has respectfully followed the findings given in A.Y 2010-11. In A.Y 2010-11, in ITA Nos. 302/DEL/2015 and 615/DEL/2015, this issue was 14 considered by the co-ordinate bench at para 65 and onwards of its order and the relevant findings of the Tribunal read as under:
"71. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that the ld. DRP directed the AO to allow the depreciation on the goodwill by following the decision of the ITAT wherein the judgment of the Hon'ble Apex Court in the case of CIT Vs Smifs Securities Ltd. reported at 348 ITR 302 and the decision of the Hon'ble Jurisdictional High Court in the case of Areva T&D India Ltd. Vs DCIT reported at 345 ITR 421 has been followed. We, therefore, by considering the totality of the facts, do not see any valid ground to interfere with the findings given by the ld. DRP on this issue. As such do not see any merit in this appeal of the department on this issue."
19. Coming to the facts which have been considered by the Assessing Officer/ld. CIT(A), we find that in the balance sheet as on 31.03.2010, goodwill has been shown at Rs. 769 millions and under Schedule IX under the head "Other Current Assets" Rs. 476 million has been shown as asset held for sale at net book value or estimated net realisable value whichever is lower and in Notes to Account, the following has been mentioned:
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"4. During the year, the Company acquired the operations of the American Express Global Travel Service Center, a business unit of American Express located in Gurgaon, India, that provides the travel-related business process outsourcing services to American Express, US, The effective date of acquisition was March 1, 2010. The purchase price of the transaction was approximately Rs. 1,350 million. The purchase consideration was allocated to identifiable assets and liabilities based on their book value and the difference between the purchase consideration and the value of net identifiable assets acquired have been recognized as Goodwill for Rs. 769 million.
The purchase consideration includes Rs. 476 million in respect of customer relationships has been held for sale to ExlServiee Holdings. Inc. the ultimate parent company, which has been disclosed under other current assets.
The company also recognized deferred tax assets on account of timing differences on liabilities assumed on acquisition."
20. From the above facts, it can be seen that Rs. 476 million was never considered for claim of depreciation on good will. Considering the facts in the light of judicial decisions and most importantly, keeping in mind that this is not the initial year of claim of depreciation, we do not find any merit in the disallowance made by 16 the Assessing Officer and upheld by the ld. CIT(A). We, accordingly, direct the Assessing Officer to delete the disallowance in the captioned A.Ys. The common grievance is allowed in the captioned appeals.
21. Second common grievance relates to disallowance made u/s 14A r.w.r 8D of the Rules.
22. We are taking the facts for A.Y 2012-13 in which year the assessee earned dividend income of Rs. 3,70,22,149/- from investments held in mutual funds which was claimed to be exempt u/s 19(34) of the Act. The investments are in mutual funds namely, ICICI Prudential Plan, Birla Sunlife Cash Plus Institutional Plans and HDFC Mutual Fund and earned dividend on daily basis on such investment.
23. The Assessing Officer straightaway applied Rule 8D of the Rules invoking provisions of section 14A of the Act mechanically and made the impugned disallowance.
24. The ld. CIT(A) upheld the findings of the Assessing Officer following the order of the DRP for A.Y 2010-11.
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25. Before us, the ld. counsel for the assessee stated that such disallowances were deleted by the Tribunal in earlier A.Ys. It is the say of the ld. counsel for the assessee that investments are only in mutual funds from which dividend is received on daily basis and simultaneously the sum is reinvested. The ld. counsel for the assessee vehemently stated that no satisfaction was recorded by the Assessing Officer having regard to the accounts of the assessee which is mandatory as held by the Hon'ble Supreme Court in the case of Godrej Boyce 394 ITR 449 and Maxopp Investment 402 ITR 640.
26. The ld. counsel for the assessee referred to the order of the Tribunal in A.Y 2011-12 in ITA No. 1482 and 1708/2016 order dated 26.08.2020 and stated that such disallowance was deleted by the Tribunal as no satisfaction was recorded by the Assessing Officer with respect to the examination of books of account.
27. Per contra, the ld. DR strongly supported the orders of the authorities below. It is the say of the ld. DR that the Assessing Officer has only applied the third limb of Rule 8D of the Rules and has made 18 disallowance of only 0.5% of the average investment which is reasonable.
28. We have given thoughtful consideration to the orders of the authorities below. A perusal of the assessment order shows that no satisfaction was recorded by the Assessing Officer with respect to the examination of the books of account. While making disallowance, the Assessing Officer observed that "It is unbelievable that for earning income of Rs. 3.70 crores, no expenditure was made by the assessee". There is not even a whisper of examination of books of account of the assessee to verify the correctness of the claim of the assessee that no expenditure was incurred for earning exempt income.
29. On similar facts, the Tribunal in A.Y 2011-12 has deleted the disallowance in ITA No. 1482 & 1708/DEL/2016 order dated 26.08.2020. The relevant findings read as under:
"15. The learned departmental representative relied upon the orders of the learned transfer pricing officer and direction of the learned dispute resolution panel. It was submitted that as the assessee has not recovered the outstanding due from its associated enterprise in accordance with the agreement, the 19 outstanding beyond that period is a separate international transaction, which is required to be benchmarked separately. He therefore submitted that no infirmity could be pointed out in the direction of the learned dispute resolution panel, which has also scale down the interest, which was computed by the learned transfer-pricing officer.
16. We have carefully considered the rival contention and perused the orders of the lower authorities. As in the present case the assessee has been granted the working capital adjustment while computing the arm's-length price of the international transaction of the sale of services, according to us no separate benchmarking should be done of the outstanding receivable as outstanding receivable are part of the working capital of the assessee. Further the issue is squarely covered in favour of assessee by the decision of the honourable Delhi High Court in case of Principal Commissioner Of Income Tax Versus Kusum Healthcare Private Limited (supra). Therefore ground number two of the appeal of the assessee is allowed and learned transfer pricing officer/learned assessing officer are directed to delete the addition of Rs 3 55509/- in relation to the delay in receipt of receivable from associated enterprise.
17. Ground number 4 to 8 of the appeal are not pressed and therefore those grounds are dismissed.20
18. Ground number 9 of the appeal is with respect to the disallowance of depreciation claimed by the appellant at the rate of 60% on voice recording software licenses amounting to 3,31,030/-. On this voice recording software license purchased by the assessee, the assessee claimed depreciation of1 98618/- at the rate of 60% however the learned assessing officer held that it is actually a license as opposed to software and assessee is eligible for depreciation at the rate of 25% only, disallowed differential depreciation of an amount of Rs 115860. The learned dispute resolution panel on objection by the assessee confirms the finding of the learned assessing officer following its directions for assessment year 2010 - 11 and held that the rate of 60% was applicable only to the computer software purchased or acquired along with the computer and not to software license.
19. The learned authorised representative submitted that this issue is squarely covered in favour of the appellant by the order of coordinate bench in appellants own case for assessment year 2010
- 11 in ITA number 302/del/2015. He extensively referred to para number 24 of that order.
20. The learned departmental representative relied upon the orders of the lower authorities. It was submitted that there is a difference between the computer software and the software on which the assessee is claiming depreciation at the rate of 60%, which is merely a license.21
21. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case, the issue is squarely covered in favour of the assessee by the decision in assessee's own case for assessment year 2010 - 11 in ITA number 302/del/2015 dated 3 January 2017 wherein para number 24 of that decision the identical software was considered. In para number 28, the coordinate bench relying on the decision of the honourable Delhi High Court in case of CIT versus BSE Yamuna powers Ltd (2013) 355 ITR 47 directed the AO to allow the claim of the assessee for depreciation at the rate of 60%. The learned departmental representative could not distinguish the above decision or brought before us any other judicial precedent. Therefore, respectfully following the decision of the coordinate bench in assessee's own case we direct the learned assessing officer to grant assessee depreciation on the above software at the rate of 60%. Accordingly, ground number 9 of the appeal of the assessee is allowed.
22. Ground number 10 of the appeal of the assessee is against the disallowance of 1,252,630 u/s 14A read with rule 8D of the income tax rules. The fact shows that during the year the appellant has earned a dividend income of RS. 1 86,74,678 from investment held in mutual funds which was exempt u/s 10 (34) or (35) of the income tax act. The details of the above dividend income show that assessee has earned such dividend income on mutual funds of liquid plan, cash plus plan and other mutual funds. The learned assessing officer noted that it is unbelievable that no expenditure was incurred by the appellant in earning such income and made 22 disallowance of 1,252,630 being 0.5% of the average value of investment related to the tax free income in terms of Section 14 A of the act by invoking the provisions of rule 8D (iii) Of the income tax rules. The learned dispute resolution panel on objection before it followed its own order for assessment year 2010 - 11 and upheld the findings of the learned assessing officer.
23. The learned authorised representative challenged the above addition on the fact that no satisfaction was recorded by the assessing officer having regard to the accounts of the assessee, which is mandatory. He relied upon the several judicial precedents for the proposition. He further submitted that appellant has earned dividend from investment in mutual fund only and mutual funds are required to pay dividend distribution tax on dividends distributed and only the net income has been received as dividends by the appellant. He further stated that mutual funds are covered by SEBI rules and charge fund management charges. Out of the income earned by the fund the fund management charges are deducted and net income is available for distribution to unit holders. He therefore submitted that during the year under consideration the assessee has received only the net income of Rs 186,74,678 after deduction of such fund management charges. He further stated that no effort/ time was utilized in receiving the dividend income and the investment activity only requires filing of mutual fund standard printed requisition forms and issue of cheques. The dividend on maturity proceeds are straightway credited to the appellant's bank account. In the end, it was 23 submitted that the coordinate bench in assessment year 2010 - 11 has set aside the matter to the file of the learned assessing officer.
24. The learned departmental representative vehemently supported the orders of the lower authority and submitted that the learned assessing officer has recorded proper satisfaction therefore the argument of the learned authorised representative that no satisfaction has been recorded is devoid of any merit. It was further stated that the learned AO has merely computed disallowance being 0.5% of the average value of the investment. He otherwise submitted that even the minimum activities that as stated by the learned authorised representative also deserves to be considered for making the disallowance and the only option left with the learned assessing officer is to invoke the provisions of rule 8D of the income tax rule for disallowance u/s 14 A of the act. He therefore submitted that no fault could be found with the orders of the lower authorities.
25. We have carefully considered the rival contention and perused the orders of the lower authorities. On careful perusal of the assessment order, it is found that in para number seven of the assessment order the learned assessing officer noted that assessee has earned dividend income of Rs. 186,74,678, which did not form part of the total income. On the basis of this the learned assessing officer straightway asked the assessee to explain as to why the disallowance u/s 14 A read with rule 8D should not be made. The assessee submitted its reply on 6th January 2015 24 stating that the assessee has not incurred any expenditure in relation to the earning of such exempt income. The learned assessing officer in para number 7.2 held that it is unbelievable that for earning an income of 1.86 crores no expenditure was made by the assessee. He noted that it is pertinent that the assessee has not provided the details of such expenses as are directly attributable to and which are necessarily required for making / maintaining investment in shares and mutual funds and earning there from. Therefore, he held that he is not satisfied with the correctness of the claim of the assessee that no expenditure has been incurred in respect of such expenditure in relation to income, which does not form part of the total income under this act. Thereafter he proceeded to compute the disallowance applying the provisions of rule 8D and computed such disallowance at 1,252,630. On careful consideration of the reasons given by the learned assessing officer we do not find any satisfaction with respect to the books of accounts maintained by the assessee that assessee has incurred any expenditure with respect to the earning of exempt income. In view of this, according to us, the learned assessing officer has failed to record any satisfaction with regard to the correctness of the claim of the assessee that it has not incurred any expenditure. The learned assessing officer did not cite any of the expenditure in the profit and loss account of the assessee, which is incurred by the assessee for earning of the exempt income. The satisfaction of the learned assessing officer as provided Under subsection 2 of Section 14 A of the income tax act is a preliminary requirement for invoking the provisions of rule 8D of the income tax rules for making a disallowance u/s 14 A of 25 the act. Therefore, in absence of any satisfaction recorded by the learned AO with respect to the examination of the books of account of the assessee to verify the correctness of the claim of the assessee, the disallowance u/s 14A cannot be sustained. Accordingly we direct the learned assessing officer to delete the disallowance of 1,252,630 made u/s On the given facts of the case in hand and respectfully following the findings of the co-ordinate bench, we direct the Assessing Officer to delete the disallowance made u/s 14A of the Act r.w.r 8D of the Rules."
30. Since we have already deleted the disallowance u/s 14A of the Act in normal computation of total income, we direct the Assessing Officer to delete the above addition while calculating the book profit u/s 115JB of the Act. This common grievance in all the appeals is allowed.
31. Next common grievance in all the appeals relates to levy of interest u/s 234A, 234B and 234C of the Act.
32. Levy of interest is mandatory though consequential. However, in so far as levy of interest u/s 234C is concerned, we direct the Assessing Officer to levy interest on the returned income of the assessee. 26
33. By way of additional ground, the assessee has claimed deductibility of education cess.
34. Before us, the ld. counsel for the assessee stated that in the return of income filed for relevant A.Ys, the assessee did not claim deduction for education cess paid before the due date for filing return of income for subject A.Ys It is the say of the ld. counsel for the assessee that the Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Limited in ITA No. 52/2018 order dated 31.07.2018 has held that education cess is an allowable deduction while computing the income under the head "Profits and gains from profession or business".
35. Even the CBDT, in its Circular No. 91/58/66-ITJ(19) dated 18.05.1967 has clarified that the word "Cess" has been omitted from clause and effect of omission of the word "Cess" is that only taxes paid are to be disallowed in the assessments for the years 1961-63 onwards. 27
36. In light of the decision of the Hon'ble Rajasthan High Court [supra] we direct the Assessing Officer to allow claim of deductibility of cess from the income in the captioned A.Ys. Additional ground in all the appeals is allowed.
37. In ITA No. 8452/DEL/19 the solitary issue which needs to be adjudicated relates to the enhancement of income of the assessee by Rs. 19,87,075/- holding that the international transaction pertaining to the provision of corporate guaranteed to the bank on behalf of the AE does not satisfy the Arm's length principle.
38. Briefly stated, the facts of this quarrel are that ExsService.INC, AE of the assessee was having tax litigation with the Income tax department for A.Y 2003-04 to 2005-06 and to settle the quarrel, it has preferred Mutual Assessment Procedure [MAP] for the said A.Y with the competent authority while MAP was pending conclusion against the demand raised for the said A.Ys, banker of the assessee i.e. HDFC Bank issue guaranteed towards President of India acting through Dy. CIT, Circle - 1(2) for tax amount aggregating to Rs. 13,24,71,650/-. Facts on record show that the said guarantee was issued by the HDFC Bank 28 on 13.04.2009 and was valid only till 12.04.2012 and accordingly, the said guarantee was not valid for the year under consideration as the guarantee expired on 12.04.2012.
39. Before us, the learned counsel for the assessee vehemently stated that in the absence of any guarantee being issued by the bank of the assessee for benefit of its AE during the year under consideration, no notional income in the form of commission ought to be imputed in the hands of the assessee company.
40. Per contra the ld. DR are strongly supported the findings of the DRP.
41. We have carefully considered the facts mentioned hereinabove. In our considered opinion, the said guarantee was issued by HDFC for and on behalf of the AE and no corporate guarantee was issued by the assessee company. The said guarantee was issued by HDFC on the basis of Fixed Deposits of the assessee company on which the assessee continued to receive interest from the bank and hence there was no cost/expenses incurred by the assessee company. 29
42. In fact, the cost charged by the bank at the time of issuing the guarantee in F.Y. 2009-10 was charged by the assessee from its AE with mark up of 14%.
43. Most importantly, as mentioned elsewhere, the said guarantee was issued by HDFC bank to the Income Tax department against the tax liability of the AE only.
44. Therefore, in case if any demand is raised upon conclusion of MAP proceedings, liability to pay the said tax demand will only be on AE of the assessee and not on the assessee company. Considering the facts in totality, we are of the considered view that the TPO/DRP erred in imputing notional income equivalent to commission charged by banks. We, accordingly, direct the Assessing Officer to delete the addition of Rs.19,87,075/-. Ground No. 4 in ITA No. 8452/Delhi/2019 is allowed.
45. To sum up, common grounds relating to disallowance of depreciation, disallowance u/s 14A, Additional ground claiming deductibility of cess are allowed and transfer pricing adjustment/ addition made in ITA No 8452/DL/2019 is also allowed. 30
46. In the result, all the appeals of the assessee in ITA Nos. 5435 & 5436/DEL/2012 and ITA No. 8452/DEL/2019 are allowed.
The order is pronounced in the open court on 08.03.2021.
Sd/- Sd/-
[SUCHITRA KAMBLE] [N.K. BILLAIYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 08th March, 2021
VL/
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi
31
Date of dictation
Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order