COSMO FIRST LIMITED,NEW DELHI V. INCOME TAX OFFICER, NATIONAL FACELESS ASSESSMENT CENTRE, DELHI

ITA 4176/DEL/2024

AI Insights

The case involves Cosmo First Limited appealing against the final assessment order passed by the Income Tax Officer, National Faceless Assessment Centre, Delhi, for the assessment year 2020-21. The primary issues in the appeal included the computation of assessed income, disallowance of deductions under Section 80G, and transfer pricing adjustments related to notional interest on outstanding receivables from associated enterprises. The tribunal examined various grounds related to corporate tax and transfer pricing, including the treatment of CSR expenditures and the eligibility for deductions under Section 80-IA. The tribunal's decision referenced multiple precedents and judicial decisions, particularly concerning the interpretation and application of Sections 80G and 80-IA of the Income Tax Act, 1961.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126885 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2020-2021
• Other Referred Cases: JMS Mining (P) Ltd. vs PCIT, Allegis Services (India) Pvt. Ltd. vs ACIT, Goldman Sachs Services Private Ltd. vs JCIT, FNF India Private Ltd. vs ACIT, Interglobe Technology Quotient (P.) Ltd. vs ACIT, Teradata India Pvt. Ltd vs DCIT, Honda Motorcycle and Scooter vs ACIT, Ericsson India Global Services Private Ltd vs DCIT, Optum Global Solutions vs DCIT, First American India Pvt. Ltd. vs ACIT, CIT vs. Bharat General Reinsurance Company Ltd., Goetze (India) Ltd. vs. CIT, SESA Goa Ltd. vs. ACIT, Pruthvi Brokers and Shareholders vs. CIT, CIT vs. Cotton Naturals India Pvt. Ltd., Kusum Healthcare Private Limited vs. CIT, Bechtel India Pvt. Ltd. vs. ACIT, CIT vs. Jindal Steel and Power Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S.K. JHADAV
• Assessee Lawyers: RAKESH GUPTA
• Keywords: Additional evidence; Transfer pricing; International transaction; Business expenditure; Capital receipt; Notional interest; Working capital adjustments; Section 234D; Reinsurance; Grounds of appeal; Principal; Chapter VIA; Business or profession; Commissioner; Capital Financing; Disallowing; Commissioner of Income Tax; Statistical purposes; Transfer; Restored; Exempt; Admission; Directions; Claim of deduction; Explanation; Percentage of profit; Services; Grace period; Companies Act; Additional claim
• Section: 143(3); 11; 13; 37; 92; 14A; 244A; 37(1); 80IA; 207; 80G

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: H : NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.4176/Del/2024 Assessment Year: 2020-21 Cosmo First Limited, 1st Floor, Uppals Plaza, M-6, Jasola District Centre, New Delhi – 110 025. PAN: AAACC1152C Vs Income tax Officer, National Faceless Assessment Centre, Delhi. (Appellant) (Respondent) Assessee by : Dr. Rakesh Gupta, Advocate; Shri Somil Agarwal, Advocate; Shri Amit Arora, CA & Ms Sanjoli Maheshwari, CA Revenue by : Shri S.K. Jhadav, CIT-DR Date of Hearing : 02.04.2025 Date of Pronouncement : .04.2025 ORDER PER ANUBHAV SHARMA, JM: This appeal is preferred by the Assessee against the final assessment order dated 25.07.2024 passed by the Income tax Officer, National Faceless Assessment Centre, Delhi (hereinafter referred to as the Ld. AO) u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) for the assessment year 2020-21. 2. The grounds raised by the assessee are as follows; ITA No.4176/Del/2024 2 “1. That on the facts and circumstances of the case and in law, the Ld. AO/ DRP erred in facts and in law, in computing the assessed income at INR 99,65,96,526 as against INR 98,26,33,810 declared in the return of income filed by the Appellant. Corporate Tax Grounds 2. That on the facts and circumstances of the case and in law, the Ld. AO/ DRP erred in facts and in law, in disallowing the deduction claimed amounting to INR 1,19,00,000 under Section 8OG of the Act. 3. That while doing so, the Ld. AO/DRP, erred in holding that the donations have been made to meet the statutory requirement of the provisions of Companies Act 2013 and were not 'voluntary donation’ to be allowable under Section 80G(1) of the Act. 4. That on the facts and circumstances of the case and in law, the Ld. AO/ DRP erred in not appreciating that there is no correlation between deduction claimed under Section 80G(1) of the Act and expenditure incurred towards Corporate Social responsibility (‘CSR’} disallowed in terms of Explanation 2 to Section 37(1) of the Act. 5. That on the facts and circumstances of the case and in law, the Ld. AO/ DRP failed to appreciate that the eligibility to claim deduction under Section 80G(1), is to be considered only as per the conditions stipulated under sub-sections (2) and (5) of Section 80G of the Act. 6. That while doing so the Ld. AO/DRP erred in disregarding that denial of deduction claimed under Section 80G(1) considering the said expenditure incurred towards CSR, which has already been disallowed in terms of explanation 2 to Section 37(1) would lead to double disallowance. 7. That on the facts and circumstances of the case and in law, the Ld, AO grossly erred in not taking into consideration the Appellant’s claim of treating receipts from Merchandise Exports from India Scheme (‘MESS’) duty reward scrips of INR 15,42,57,286 as 'capital receipt' not liable to tax, made during the course of assessment proceedings and not passing a speaking order in respect thereof. 8. That on the facts and in the circumstances of the case and in law, the Appellant seeks to claim and enhance deduction under Section 80-IA of the Act, by considering the market price of electricity as charged by state electricity board to consumers in the open market in terms of Section 80- IA(8) of the Act and as per the ratio laid by Supreme Court in case of ITA No.4176/Del/2024 3 Jindal Steel & Power Limited, for electricity equivalent to energy generated by eligible business units. 9. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in incorrectly computing the tax liability by considering income from capital gain twice. Transfer Pricing Grounds 10. That the Ld. AO/ Deputy Commissioner/Additional Commissioner of Income Tax, Transfer Pricing Officer-1(2)(1) (hereinafter referred to as \"Ld. TPO”) / Ld, DRP erred on facts and in law in confirming an adjustment amounting to INR 20,62,216/-on account of notional interest relating to the alleged delay in recovery of outstanding receivables pertaining to sales made to its associated enterprises (\"AEs\"); 11. Without prejudice, the Ld. AO/ Ld. TPO/ Ld. DRP erred on facts and in law by failing to appreciate that in the facts of the case there was no cause or motive for the Appellant to shift profits out of India by not charging interest on outstanding receivables of its AEs. 12, That the Id, AO/ld. TPO/Ld. DRP erred on facts and in law in not appreciating that notional interest on receivables does not constitute an international transaction so as to invoke provisions of section 92 of Act. 13. That the Id. AO/Ld. TPO/ Ld. DRP erred on facts and in taw in confirming the re-characterization of the outstanding receivables pertaining to sales made to AEs as unsecured loan. 14. That the Ld. AO/ld. TPO/Ld. DRP erred on facts and in law in failing to appreciate that the Appellant did not charge interest on receivables outstanding in relation to sales made to independent unrelated customers and was therefore not required to charge interest on receivables outstanding in the account of the AEs. 15. That, without prejudice to the above grounds, the Ld. AO/ld, TPO/Ld, DRP erred on facts and in law in not appreciating that even considering the excess credit period no adjustment is warranted in as much as the operating margin of the Appellant is higher than the operating margins of the comparable companies adjusted for differences in the level of working capital. 16. Without prejudice to above, the Ld. AO/Ld. TPO/Ld. DRP erred on facts and in law in not appreciating that even if the interest on outstanding receivables is to be considered as part of sale price of goods, it stands benchmarked along with such transaction of sale of goods. ITA No.4176/Del/2024 4 17. Without prejudice, the Ld, AO/ Ld. TPO/ Ld, DRP erred on facts and in law in incorrect application of Transfer Pricing Method, as defined under the Act, by arbitrarily considering credit period of 60 days while computing interest on delay in realization of outstanding balances from AEs. 18. That Ld. AO/Ld, TPO/Ld. DRP erred on the facts and in Law by not understanding the business model/contractual terms of the Assessee and accordingly erred in not appreciating that even if the interest on outstanding receivables of the AEs is to be considered, then the credit period of 105 days as allowed by the Assessee to its AE is to be considered while computation of interest on outstanding receivables. 19. That the Ld. AO/Ld. TPO/Ld, DRP erred on the facts and in law in arbitrarily computing interest on delay in realization of outstanding balances from AEs considering 60 days as credit period, without appreciating the fact that credit period allowed by the assesse to Non AE/ unrelated customers is 90 days, which can be considered as Comparable Uncontrolled Price. While doing so, the Ld. AO/Ld. TPO/ Ld. DRP completely failed to furnish the appropriate reasons for arriving onto aforesaid findings and demonstrating the basis of determining the aforesaid. 20, That the Ld. AO/Ld. TPO erred on the facts and in law by computing the interest for the months beyond the relevant assessment year which is bad in law and legally not tenable. 21. That the Ld. AO erred in incorrectly levying interest under Section 234D of the Act. 22. That the Ld. AO erred in incorrectly computing interest under Section 244A of the Act. 23. That the Ld. AO erred in initiating penalty proceedings alleging underreporting of income under Section 270A of the Act. The above grounds of appeal are independent of, and without prejudice to each other. That the Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.” 3. Heard and perused the records. The assessee’s return of income was selected for scrutiny. The assessee had revised the return. The assessee is ITA No.4176/Del/2024 5 engaged in the business of manufacturing of biaxially oriented polypropylene films and also engaged in the production of flexible packaging films. A variation in respect of transfer pricing adjustment, disallowance u/s 80G and 14A were made and the income of the assessee was determined from Rs.98,26,33,810/- to Rs.99,65,96,526/-. However, there was additional claim of the assessee for treating duty rewarded as capital receipt which was not considered by the ld. tax authorities below and, further, the Ld. AR has pointed out that ground no. 8 is in fact an additional ground as the same is consequential to a subsequent decision of Hon’ble Supreme Court and for which additional evidences are also filed. 4. Ground No. 2-6: These grounds relate to disallowance of deduction u/s 80G amounting to Rs. 1,19,00,000/- on the ground that the donation was made to meet statutory requirement of CSR and was thus not voluntary which is the pre- requisite for any sum to be called ‘donation’. At PB 1120-1122 contain application and approval u/s 80G of Cosmo Foundation. Appellant made donations to two institutions, - (i) M/s Cosmo Foundation- Rs. 2,37,53,585/- (ii) Charutar Aarogya Mandal- Rs. 1,00,000/-. Thus, aggregating to Rs. 2.38 crore. The said amount being CSR expenditure was disallowed by the assessee in the computation of income but since these donations qualified for deduction u/s 80G, & hence 50% of Rs. 2,38 crore i.e. Rs. 1.19 crore was claimed u/s 80G. At PB 851-853 is the copy of computation of income showing the add back of Rs. ITA No.4176/Del/2024 6 2.38 crores and claim of deduction u/s 80G of Rs. 1.19 crore. At PB 742-759 are receipts of donation to Cosmo Foundation and Charutar Aarogya Mandal. 4.1 Now this issue that deduction is admissible u/s 80G even though initially it was part of CSR, is directly covered by catena of judicial decisions in JMS Mining (P) Ltd. vs PCIT (2021), 130 taxmann.com 118 (Kolkata-trib.); Allegis Services (India) Pvt. Ltd. vs ACIT, in ITA No. 1693/Bang/2019, for AY 2016- 17, on 29.04.2020.; M/s Goldman Sachs Services Private Ltd. vs JCIT, in ITA No. 2355/Bang/2019, for AY 2015-16, on 15.06.2020; M/s FNF India Private Ltd. vs. ACIT, in ITA No. 1565/Bang/2019, for AY 2016-17, on 05.01.2021. (CLC 119-125); Interglobe Technology Quotient (P.) Ltd. vs. ACIT, in ITA No.95/DEL/2024; Teradata India Pvt. Ltd vs. DCIT, in ITA No. 1248 & 2337 (Delhi ITAT) 2024.; Honda Motorcycle and Scooter vs. ACIT, in lTA No. 1523/Del/ 2022. Ericsson India Global Services Private Ltd vs. DCIT, in ITA No.1150/DEL/2024.; Optum Global Solutions vs. DCIT, in ITA No. 145 & 482 (Hyderabad ITAT) 2022.; First American India Pvt. Ltd. vs. ACIT, in ITA No. 1792/DEL/2019. Thus by following the following findings of coordinate bench decision Interglobe Technology Quotient (P.) Ltd. vs. ACIT, (supra), on which one of us, the judicial member was also in quorum, we sustain these grounds; “7.1 Further, we like to observe that as a matter of fact as per Section 135 of the Companies Act, 2013 ('CA 2013), the qualifying Companies as mentioned therein ITA no. 95/Del/2024 are required to spend certain percentage of profits of last three years on activities pertaining to ITA No.4176/Del/2024 7 Corporate Social Responsibility (CSR). The expenditure on CSR, could be by way of expenditure on projects directly undertaken by said companies, such as setting up and running schools, social business projects, etc. Such expenditure would include expenditure otherwise falling for consideration under section 37(1) of the Act. On the other hand, companies, instead of undertaking or participating directly in a project, may choose to give donations to institutions that are engaged in undertaking such projects, which is also a recognized way of compliance of CSR obligation. 7.2 The assessing officer and CIT(A) have relied upon General Circular 14/2021 dated 25.08.2021 issued by MCA and \"Explanatory Notes to the provisions of the Finance (No.2) Act, 2014\" to hold that donations made as part of CSR expenditure are not allowable as deduction. The foundation of their reasoning being that the donation is voluntary in nature, while CSR expenditures are under statutory obligations. 7.3 As we take notice of the fact that Parliament legislated that CSR expenses would not be eligible for deduction as business expenditure under section 37 of the Act by inserting Explanation 2 to section 37(1) vide the Finance (No.2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any ITA no. 95/Del/2024 expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the CA 2013, shall not be deemed to be an expenditure incurred by an assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the IT Act. The intent of Parliament in bringing the aforesaid provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under ; \"CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business, As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for .computing the taxable income of the company, Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.\" (emphasis supplied) 7.4 The aforesaid explanatory memorandum categorically expresses the legislative intent and the rationale of disallowance of CSR expenditure referred to in section 135 of the Companies Act, that such expenditure is application of income and not incurred for the purposes of business. We are of considered view that this in itself justifies the grant of deduction u/s 80G. As CSR expenditure is application of income of the assessee under the Income Tax Act, that means it continues to form part of the Total income of the assessee. Section 80G(1) of the Act provides that in computing the total income of an assessee, there ITA No.4176/Del/2024 8 shall be ITA no. 95/Del/2024 deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) lists down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1) of the Act. Thus, there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act. 7.5 As with regard to the reasoning that CSR expenditure are not voluntary but mandatory in nature due to penal consequences, we are of considered view that voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled. There is no allegation of Revenue that other conditions of Section 80G are not fulfilled. We, thus sustain the ground.” 5. Ground No.7: The ground relates to not treating the receipts from Merchandise export from India Scheme (MEIS) duty reward scripts of Rs. 15,42,57,286/- as capital receipt not liable to tax, & such claim was made during the course of assessment proceedings, it was denied by AO. The case of assessee is that such receipt is capital receipt and is not taxable even in the face of the definition of ‘income’ given u/s 2(24)(xviii) of the Act. Now as settled proposition of law there can be no estoppel against the law and assessee can make a claim of exemption even if originally assessee itself offered the income to tax. Reliance can be placed on CIT vs. Bharat General Reinsurance Company Ltd. (1971) 81 ITR 303 (Delhi). Further it also settled now that even if ITA No.4176/Del/2024 9 claim was not made in the return, appellate authority is not precluded from entertaining the said claim. Reliance can be placed on Goetze (India) Ltd. vs. CIT, 284 ITR 323 (SC).; SESA Goa Ltd. vs. ACIT, 430 ITR 114 (Bom) and Pruthvi Brokers and Shareholders 349 ITR 336 (Bom). On merit, this issue is covered by decision of Eastman Exports Global Clothing Pvt. Ltd.- ITA No. 3326/2019 dated 20.09.2024. Thus this ground is allowed for statistical purposes and restored to the Ld. AO with direction to admit the claim and consider the same as per the law. 6. Ground No.8 It relates to allowing lesser deduction u/s 80IA by not considering the Market Price of electricity charged by the State Electricity Board to consumers in open market in terms of 80-IA(8) read with decision of Hon’ble Supreme Court in the case of CIT vs Jindal Steel and Power Ltd. (2023) 157 taxmann.com 207 equivalent to energy generated by eligible business unit. Though deduction u/s 80-1A has been claimed by the assessee in its return of income but assessee seeks to enhance its claim in the light of above judicial decision of Hon’ble Supreme Court by filing a petition for additional ground supported by petition of admission of additional evidence. Assessee has filed at PB 644-658 copy of Form Nos. 10CCB for Karjan and Waluj units computing deduction of Section 80-IA at Rs. 1,23,67,921/- and Rs. 1,17,43,208/- respectively, aggregating to Rs.2,41,11,13 9/-. PB 851 is computation of income claiming deduction under section 80-IA at Rs.2,41,11,139/-. PB 104-116 are ITA No.4176/Del/2024 10 revised Form Nos. 10CCB for Karjan and Waluj units computing deduction under section 80-IA at Rs. 18,95,68,453/- and Rs. 12,07,36,503/- respectively, aggregating to Rs.31,03,04,955/-. PB 331-332 contain revised computation of Income as per enhanced claim as under section 80-IA. PB 25-332 contain additional evidence justifying inter-alia the claim of deduction under section 80- IA at Rs.31,03,04,955/-. Enhanced claim of the assessee is based on the judicial decision of Hon’ble Supreme Court in case of CIT vs Jindal Steel and Power Ltd. (supra). Which certainly is considerable however as the same need verification of facts, the ground deserves to be allowed for statistical purposes with direction to AO to verify the additional evidences filed before us and then allow the enhanced claim. 7. Ground no. 9. As the only grievance of assessee is that income from capital gain has been considered twice in computation the ground is allowed for statistical purpose and ld. AO is directed to take cognizance of same and determine the computation afresh. 8. Ground No. 10-20: These grounds related to Transfer Pricing of Rs. 20,62,216/- on account of notional interest relating to alleged delay in recovery of outstanding receivable pertaining to sales made to its associate enterprises. In the draft assessment order (Page no. 482-489), Ld. AO proposed an addition of Rs.98,28,820/- in respect of notional interest on receivables in respect of sales made to AEs. Ld. TPO has mentioned that as per Clause (i) (c) of Explanation to ITA No.4176/Del/2024 11 Section 92, ‘International Transaction’ includes capital financing, including any type of long term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payments or receivable or any other debt arising during the course of business. In view of this clause, he was of the view that the assessee was obliged to benchmark interest on outstanding receivables. However, the assessee had not provided any benchmarking for this purpose. Therefore, he proceeded to benchmark the same. In this connection, he listed 321 invoices where receipts were delayed beyond a period of 30 days from the date of invoice. He allowed grace period of 30 days and charged interest at the rate of 6.371% per annum for the delayed period on the basis of LIBOR+400bps. Such interest was computed at Rs.98,28,820/- and it was suggested that the income of the assessee may be revised upwards by an identical amount. 8.1 The case of assessee is that assessee had requested for working capital adjustment in the case of comparable. This was denied on the ground that the assessee has not demonstrated that there is a difference in the levels of Working Capital employment by it vis-a-vis, the comparable. This adjustment is not a matter of right and it must be based upon some data. Adopting this recommendation of the TPO, the Ld. AO made adjustment of Rs.98,28,820/- to the income of the assessee by stating that adjustment suggested by the TPO is binding on him u/s Section 92CA(3). This addition was challenged before ITA No.4176/Del/2024 12 Hon’ble DRP. It was contended that in view of the decision of Hon’ble Delhi High Court in the case of Kusum Healthcare Private Limited, ITA 765/2016 if impact of credit period was factored in Working Capital Adjustment while determining the Arm’s Length Price, then no further adjustment was required for interest on receivables. However, the submissions were not accepted. It was mentioned that in the case of CIT vs. Cotton Naturals India Pvt. Ltd. (2015) 55 taxmann.com it has been held that interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principal should apply in respect of delayed receipts arising out of sales. It was held that appropriate CUP keeping in view currency risk borne by the assessee and other factors, LIBOR+400bps is applied for calculating interest on delayed realizations. The Ld. AO had allowed a grace period of 30 days, which however was increased to 60 days by Hon’ble DRP. In view of this, interest on delayed payments beyond 60 days was computed at Rs.20,62,216/- by the Ld. AO in the final order. 8.2 In this context we appreciate the submission of ld. AR that assessee is giving like over 90 days credit to Indian customers. The decision in Kusum Helath care (supra) has been followed in Bechtel India Pvt. Ltd., ITA No. 7234//DEL/2017, dated 18.12.2020, subsequent to CIT vs. Cotton Naturals India Pvt. Ltd. (supra). Thus we are inclined to sustain these grounds to the extent that assessee is entitled to working capital adjustments. The issue is restored to the ITA No.4176/Del/2024 13 files of AO for giving working capital adjustment to impugned international transaction. 9. Resultantly the appeal is allowed with directions to the Ld. AO to give consequences to the determination of grounds, as above. Order pronounced in the open court on 23.04.2025. Sd/- Sd/- (MANISH AGARWAL) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 23rd April, 2025. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "