Appeal details
Counselvise Citation
[2022] 103 COUNSELVISE.COM (IT) 9487 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 month(s) 1 day(s)
Appellant
Respondent
Appeal Type
Income Tax (Transfer Pricing) Appeal
Pronouncement Date
30-10-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
B
Next Hearing Date
19-10-2022
Assessment Year
2018-2019
Appeal Filed On
28-08-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.753/Bang/2022 Assessment year : 2018-19 MWYN Tech Private Ltd., G-405, 4 th Floor, Gamma Block, Sigma Soft Tech Park, Varthur Kodi, Ramagondanahalli, Bangalore – 560 066. PAN: AAJCM 9831D Vs. The Income Tax Officer, 4(1)(3), Bangalore. APPELLANT RESPONDENT Assessee by : Smt. Tanmayee Rajkumar, Advocate Respondent by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 20.10.2022 Date of Pronouncement : 31.10.2022 O R D E R Per Padmavathy S., Accountant Member This appeal by the assessee is against the final assessment order passed by the Income Tax Officer, Ward 4(1)(3) (AO), Bangalore, dated 30.06.2022, u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] for the assessment year 2018-19. 2. The assessee is a wholly owned subsidiary of MyCash Fintech Pte Limited, Singapore. The assessee engaged in the business of IT(TP)A No.753/Bang/2022 Page 2 of 23 providing software development services (SWD) including development, testing, implementation of applications etc., to assessee’s Associated Enterprise (AE) i.e., MyCash Fintech. The assessee filed the return of income for the assessment year 2018-19 on 29.11.2018 declaring a loss of Rs.5,45,49,034. The case was selected for scrutiny under CASS. A reference was made to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) of the International Transactions the assessee has entered into with the AE. The TPO passed an order dated 29.07.2021 determining a TP adjustment of Rs. 52,16,943/- in respect of the SWD services segment. The draft assessment order dated 27.08.2021 was passed by the AO, in which the aforesaid TP adjustment was incorporated. The AO also proposed the following adjustments to the returned income: a) addition of Rs. 96,23,15,500/- under Section 69 of the Act relating to time deposits; b) Addition of Rs. 64,800/- being employees’ contribution to employees welfare fund remitted after the prescribed due date; and c) disallowance of expenses amounting to Rs. 2,14,87,266/-, being 20% of the advertisement and information technology expenses. 3. On objections, the DRP vide its directions dated 06.05.2022 granted marginal relief to the assessee. Consequently, the AO passed the impugned final assessment order dated 30.06.2022, in which the TP adjustment was reworked to Rs. 45,08,087/- and the other adjustments proposed in the draft assessment order were upheld by the DRP. Aggrieved, the assessee is in appeal before this Tribunal. IT(TP)A No.753/Bang/2022 Page 3 of 23 4. The assessee raised grounds pertaining to the following issues arising for consideration in this appeal pertain to: i. Ground 1 – General ii. Ground 2 – Non-compliance of section 144B iii. Ground 3 (sub-grounds 3.1 to 3.8) Transfer Pricing adjustment of Rs. 45,08,087/- iv. Ground 4 - Addition of Rs. 96,23,15,500/- u/s. 69 of the Act being the difference between the amount of time deposits reported in Form No. 26 and closing balance as per the balance sheet; v. Ground 5 - Disallowance of Rs. 2,14,87,266/- being 20% of expense claimed under the head ‘Advertisement Payments’ and ‘Information Technology expense’; and vi. Ground – 6 - Addition of Rs. 64,800/-, being employee’s contribution to provident fund deposited after the due date under the relevant statute. TP adjustment 5. The details of international transactions of the assessee are as follows:- Particulars Amount Receipt towards provision of software development services Rs. 9,13,63,594/- Issue of equity shares Rs. 45,09,20,890/- Recovery of expenses Rs. 1,15,30,389/- 6. As per the Transfer Pricing study, the assessee has adopted Transaction Net Margin Method (TNMM) as the most appropriate IT(TP)A No.753/Bang/2022 Page 4 of 23 method for determination of ALP. The operating profit by Operating Cost is the Profit Level Indicator (PLI = OP/OC) The Net mark-up on cost as computed by the assessee in the TP study are as under:- Operating Income Rs. 9,13,63,594/- Operating Cost Rs. 7,87,61,719/- Operating Profit (Op. Income – Op. Cost) Rs. 1,26,01,875/- Operating/Net mark-up (OP/OC) 16% 7. The comparables selected by assessee and the range of weighted average of OP/OC of comparable companies are as listed below - Sl. No. Name of the company Weighted average (in %) 1. Rheal Software Technologies Pvt. Ltd. -4.26 2. Maveric Systems Ltd. 0.19 3. Isummation Technologies Pvt. Ltd. 3.44 4. Yudiz Solutions Pvt. Ltd. 4.18 5. Sagarsoft (India) Ltd. 5.89 6. Sasken Communication Technologies Ltd. 6.52 7. CG-VAK Software & Exports Ltd. 8.19 8. E-zest Solutions Ltd. 9.29 9. Mukand Engineers Ltd. Infotech 21.18 10. R Systems International Ltd. 24.17 11. Infobeans Technologies Ltd. 25.85 12. Bhilwara Infotechnology Ltd. 26.45 13. Tata Elxsi Ltd. 27.19 35 th Percentile 5.89 Median 8.19 65 th Percentile 21.18 8. Since the margin of the assessee is within the range of 35 th percentile and 65 th percentile of the comparable companies the assessee concluded that the TP margins are within arm’s length. IT(TP)A No.753/Bang/2022 Page 5 of 23 9. Out of the 13 comparables selected by the assessee, the TPO accepted the Infobeans Technologies Ltd. and Tata Elxsi Ltd. and rejected the other companies on application of various filters. The comparables selected by TPO and the median of weighted average of PLIs of the companies are as follows:- Sl. No. Name of the Company weighted average (in %) 1. Infomile Technologies Ltd. 9.69 2. Harbinger Systems Pvt. Ltd. 11.65 3. Exilant Technologies Pvt. Ltd. 17.17 4. Tech Mahindra Ltd. 18.57 5. Larsen & Toubro Infotech Ltd. 18.94 6. Great Software Laboratory Pvt. Ltd. 19.73 7. Elveego Circuits Pvt. Ltd. 20.19 8. Black Pepper Technologies Pvt. Ltd. 20.62 9. Mindtree Ltd. 21.21 10. Aptus Software Labs Pvt. Ltd. 22.70 11. Acewin Agriteck Ltd. 24.51 12. Persistent Systems Ltd. 24.98 13. Wipro Ltd. 26.83 14. Tata Elxsi Ltd. 28.24 15. Infobeans Technologies Ltd. 28.52 16. Nihilent Ltd. 30.17 17. Thirdware Solution Ltd. 30.94 18. Threesixty Logica Testing Services Pvt. Ltd. 36.58 19. Infosys Ltd. 37.38 20. Cybage Software Pvt. Ltd. 55.81 35 th Percentile 20.19 Median 23.60 65 th Percentile 26.83 IT(TP)A No.753/Bang/2022 Page 6 of 23 10. The TPO re-computed the ALP by making adjustments to the operating revenue of the assessee and considering the margin of the new set of comparable companies chosen. Accordingly, the TP adjustment arrived at by the TPO is as under:- Taxpayers operating revenue Rs. 9,21,32,542/- Taxpayer operating cost Rs. 7,87,61,719/- Taxpayers operating profit Rs. 1,33,70,823/- Taxpayers PLI 16.98% 35 th Percentile Margin of comparables set 20.19% Adjustment required (if PLI<35 th Percentile) Yes Median margin of comparable set 23.60% Arm’s length price Rs. 9,73,49,485/- Price received Rs. 9,21,32,542/- Shortfall being adjustment u/s. 92CA Rs. 52,16,943/- 11. Aggrieved the assessee raised objections before the DRP. The DRP directed inclusion of CG-VAK Software and Exports Ltd. and rejected all the other contentions of the assessee seeking exclusion of incomparable companies and inclusion of comparable companies. The TP adjustment was revised to Rs.45,08,087. The assessee is in appeal before the Tribunal against the final order passed in accordance with DRP directions. 12. Out of the grounds raised contending transfer pricing adjustment during the course of hearing the ld AR presented arguments pertaining to only the following grounds and accordingly the rest of the sub- grounds in ground 3 are dismissed as not pressed – a. That the TPO/DRP erred in excluding Isummation Technologies Pvt. Ltd. and Yudiz Solutions though the same are functionally comparable to the Assessee. (Ground No. 3.4) IT(TP)A No.753/Bang/2022 Page 7 of 23 b. That Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd., Infosys Ltd. and Cybage Software Pvt. Ltd. ought to be excluded from the list of comparables as the same fail the turnover filter. (Ground No. 3.5) Ground no.3.5 – Turnover filter 13. Through ground No.3.5, the assessee is seeking exclusion of Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd., Infosys Ltd. and Cybage Software Pvt. Ltd. from the list of comparables on the basis that these companies fail the turnover filter. 14. The ld. AR submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the Assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. The difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small-scale company would be much higher than that of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the IT(TP)A No.753/Bang/2022 Page 8 of 23 turnover of the assessee from rendering SWD services is Rs. 9,13,63,594/-. This being so, the TPO ought to have applied the upper turnover filter while selecting companies comparable to the Assessee. In this regard, the Assessee places reliance on the decision of this Hon’ble Tribunal in Autodesk India (P) Ltd. V. DCIT [Reported in (2018) 96 taxmann.com 263 (Bang Trib)]. On application of the turnover filter on 1-200 crores, the above 11 companies are to be excluded. Further reliance is placed on the decision of this Hon’ble Tribunal in ACI Worldwide Solutions Pvt. Ltd. v. ACIT (order dated 13.05.2022 passed in IT(TP)A No. 106/Bang/2022). 15. The ld. DR supported the order of the lower authorities. 16. We have considered the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of Autodesk India Pvt Limited (supra) has considered the issue of application of turnover filter and has held that – 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water IT(TP)A No.753/Bang/2022 Page 9 of 23 India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and IT(TP)A No.753/Bang/2022 Page 10 of 23 that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 17. During the course of hearing the ld AR drew our attention to the table with details of the turnover of the companies, for which the exclusion is sought based on upper turnover filter and submitted that the turnover of the assessee is Rs. 9,13,63,594 and therefore these companies need to be excluded. On perusal of the same, we notice that the turnover of the companies are as listed below – Sl. No. Name of the Company Turnover (in crores) 1 Exilant Technologies Pvt. Ltd., 332.43 2 Tech Mahindra Ltd., 23661.20 3 Larsen & Toubro Infotech Ltd., 6906.40 4 Mindtree Ltd., 5325.00 5 Nihilent Ltd., 280.06 6 Persistent Systems Ltd., 1732.00 7 Wipro Ltd., 44710.00 8 Tata Elxsi Ltd., 1386.29 9 Thirdware Solutions Ltd., 204.38 10 Infosys Ltd. and 61941.00 11 Cybage Software Pvt. Ltd. 731.16 IT(TP)A No.753/Bang/2022 Page 11 of 23 18. Considering the facts and respectfully following the decision of the coordinate bench of the Tribunal in the case of Autodesk India Pvt Ltd., (supra) we hold that the companies whose turnover in the current year is more than Rs.200 crores should be excluded from the list of comparable companies. Ground no.3.5 - Inclusion of Isummations Technologies Ltd. and Yudiz Solutions Pvt. Ltd. Isummations Technologies Ltd 19. The ld. AR submitted that Isummations Technologies Ltd was selected by the assessee and the company is functionally comparable since the company passes all the filters applied by the TPO. The TPO rejected the company on the ground that it fails positive net worth filter and export earnings filter. It is also submitted that the DRP, while rightly held that the company's export earnings constituting 99.63% of total revenue, the company passes the filter, erroneously concluded by holding that the company fails the said filter. The ld AR further submitted that the company passes the export earnings filter and that, the company's net worth stands is Rs. 4.7 million. The ld AR prayed therefore that the company ought to be included in the final list of comparables. 20. We heard the rival submissions and perused the material on record. We notice that the above company is rejected by the TPO on the ground that the company fails the export turnover filter and has a negative net worth. We also notice that the DRP on perusal of the IT(TP)A No.753/Bang/2022 Page 12 of 23 annual report has held that the turnover of the company has an export turnover of Rs.2,18,46,527 against a total turnover of Rs.2,19,26,527 thereby satisfying the export turnover filter. It is further noticed that the DRP, though has recorded the finding that the assessee’s export turnover 99.63%, has concluded that it fails export turnover filter which in our view is an erroneous conclusion. Further we notice from the perusal of the annual report of the company, that the company has a positive networth of Rs.4,749,635 (page 749 of paper book) as of 31.03.2018. In view of these factual findings and considering that the company is functionally comparable to the assessee we hold that Isummations Technologies Ltd be included in the list of comparable companies. Yudiz Solutions Pvt. Ltd 21. This company was selected by the assessee but was rejected by the TPO on the ground that it fails export turnover filter. The DPR upheld the rejection on the grounds that (i) the company not having featured in the search matrix of the TPO and its selection would result in cherry picking; and (ii) the assessee had not produced any documentation to show why the company was not selected in its TP study. 22. The ld AR submitted that the company passes the export turnover filter applied by the TPO since out of the total revenue is Rs. 5.55 crores export revenue is Rs. 5.23 crores and thus the export revenue comprising 94.23% of the turnover. The ld AR also submitted IT(TP)A No.753/Bang/2022 Page 13 of 23 that the DRP proceeded on the erroneous basis that the company was originally not selected in the TP study, when in fact, the company was a TP study comparable. The ld AR further submitted that the company is functionally comparable and cannot be excluded merely on the basis that the company is not featuring in the search matrix of the TPO. In this regard the ld AR relied on the decision of the coordinate bench of the Tribunal in the case of Prism Networks Private Limited vs ACIT [2022] 141 taxmann.com 163 (Bangalore - Trib.). 23. We heard the ld DR. On perusal of the financials of the company (page 785 of Paper Book) it is noticed that the export turnover of the company is Rs.5,22,89,062 against the total turnover of Rs.5,55,40,238 which is around 94.15% that clearly indicates that the company would pass the export turnover filter of >75%. Further the company is functionally comparable to the assessee. The coordinate bench of the Tribunal in the case Prism Networks (supra) has considered the issue exclusion of a comparable company since the same is not featuring in the search matrix of the TPO and held that - 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable IT(TP)A No.753/Bang/2022 Page 14 of 23 companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes 24. In view of the facts considered above and respectfully following the decision of the coordinate bench in the above decision, we remit the issue back to the TPO/AO for a fresh consideration of the comparability of the company after giving the assessee as reasonable opportunity of being heard. 25. The TPO is directed to recomputed the ALP in accordance with the directions given in this order. It is ordered accordingly. CORPORATE TAX 26. Ground No. 4: The assessee is challenging the action of the Assessing Officer in making an addition under Section 69 of the Act of Rs. 96,23,15,500/- being the difference between amount of time deposits reported in Form No. 26 and closing balance of time deposits as per balance sheet. The AO during the course of assessment proceedings noticed that there is a difference in the amount of fixed deposits as per Form 26AS and as per Balance Sheet of the assessee as of 31.03.2018. The AO proceeded to add this difference as undisclosed income u/s.69. The DRP upheld the addition. 27. The ld AR submitted that :- IT(TP)A No.753/Bang/2022 Page 15 of 23 (i) During the year under consideration, the assessee had issued equity shares to its parent company and was in receipt of Rs. 45,09,20,890/-, which it invested into secured time deposits. (ii) On maturity of the fixed deposits, and in case of non-withdrawal, the deposit automatically gets renewed for a further period (along with accrued interest) as new fixed deposit in the Core Banking Software of the Banks. (iii) As a result of this, the Banks reported both the initial fixed deposit and the auto-renewed Fixed deposit as independent items, and thereby the same has appeared in Form 26AS. (iv) While Form 26AS records all the deposits, both original and renewed, in the financial statement all deposits that were live as on 31st March 2018 were accounted for disclosed appropriately. (v) The discrepancy between the financial statements and Form 26AS is on account of the recording of the deposits twice over (original and renewed) in Form 26AS. 28. The ld AR filed ledger extracts of Yes Bank and RBL Bank and confirmation from the said Banks as to the balances as on 31st March as additional evidence, in support of its contentions and prayed for the admission of the same. The ld AR also submitted that the details of the deposits (pages 446-452 and 458-468 of the Paper Book) are submitted along with a reconciliation of the deposits made and the entries in Form 26AS before the AO. 29. We have heard the rival submissions and perused the material on record. The additional evidences now produced go the root of the issue and the core reason for making the addition u/s. 69 by the lower IT(TP)A No.753/Bang/2022 Page 16 of 23 authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. 30. We notice that the assessee is having fixed deposits with RBL Bank Limited, Yes Bank Ltd., and HSBC. On perusal of the statement of reconciliation submitted it is also noticed that the assessee is renewing the deposits on maturity either in the same bank or in another one of these three banks. The AO has taken the total SFT transactions as reflected in Form 26AS and has compared the same with the Balance Sheet figure of Deposits as of 31.03.2018 and has made the addition for the differential amount. This in our considered view is not correct comparison since the SFT transactions in Form 26AS reflect the transactions that happened during a period of time whereas the Balance Sheet reflect the status as on the last day of the financial year. Therefore, a direct comparison of these two will not be the right approach. We also notice that the AO and the DRP has not analysed the submissions of the assessee that the deposits on maturity were re- deposited and that Form 26AS reflects the entire movement. The ld AR submitted the additional evidence with the deposit confirmations from the bank and also submitted a reconciliation between the amount as per Form 26AS and the Balance Sheet. Considering that the lower authorities have not verified the details factually, we remit the issue back to AO for a proper verification of the bank confirmations and the reconciliation keeping in mind that the movement of deposits during the year as reflected in 26AS cannot be directly compared with the balance as on Balance Sheet date. The AO is also directed to delete the IT(TP)A No.753/Bang/2022 Page 17 of 23 addition after examining the details submitted by the assessee in accordance with law. This ground is allowed for statistical purposes. 31. Ground No. 5: Vide this ground, the assessee is challenging the action of the Assessing Officer in disallowing an amount of Rs. 2,14,87,266/-, being 20% of the ‘Advertisement Payments’ and ‘Information Technology expense’. 32. It is submitted that the AO while holding that the expenses cannot be denied for the business activity, disallowed 20% of the expenses on the ground that the assessee had not furnished certain details, which was affirmed by the DRP. 33. The ld.AR submitted that an amount of Rs. 1,15,64,735/- was incurred towards information technology expenses and an amount of Rs. 9,58,71,595/- towards advertisement expenses. Wherever taxes were required to be deducted at source, it was duly deducted the taxes and remitted. Details of the taxes deducted/reason for non-deduction was furnished to the AO, which he failed to take into consideration. 34. The ld DR submitted that the assessee has not furnished any details before the lower authorities and therefore submitted that in absence of any supporting the lower authorities are justified in making addition. 35. We heard the rival submissions and perused the material on record. The main reason for the adhoc disallowance by the lower authorities is that the assessee did not submit any details or evidences IT(TP)A No.753/Bang/2022 Page 18 of 23 to support the claim that these expenses are incurred for the purpose of business. During the course of hearing, the ld AR submitted that the relevant details are placed at pages 471-473 of the Paper Book and that the same is not examined. In view of this we remit the issue back to the AO with a direction to verify the details and the evidences with regard to the expenses and decide the allowability in accordance with law. The assessee is directed to submit all the relevant details and cooperate with the proceedings. It is ordered accordingly. 36. Ground No. 6: The assessee challenges the action of the AO in disallowing an amount of Rs. 64,800/- being employee’s contribution to provident fund remitted after the due date prescribed under the relevant statute, but before the due date for filing of return of income. 37. During the financial year under consideration, the assessee remitted employees’ contribution to provident fund after the due dates prescribed under the relevant statutes, but before the due date of filing of its return of income. The AO held that the contribution not having been remitted by the “due date” as specified in Section 36(1)(va) of the Act, disallowed the same. The DRP affirmed the disallowance. 38. In this regard the ld.AR submitted that the assessee having remitted the contribution within the due date for filing the return of income, is eligible to claim deduction of the contribution. Reliance in this regard is placed on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. Sabari Enterprises (reported in [2008] IT(TP)A No.753/Bang/2022 Page 19 of 23 298 ITR 141 (Kar.). Therefore, it was submitted that the disallowance made ought to be deleted. 39. The ld. DR brought to our attention the latest decision of the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. Vs CIT-1, [2022] 143 taxmann.com 178 (SC) where the Apex Court has held that Section 43B(b) does not cover employees' contributions to PF, ESI etc., deducted by employer from salaries of employees and that employees contribution has to be deposited within the due date u/s 36(1)(va) i.e. due dates under the relevant employee welfare legislation like PF Act, ESI Act etc. failing which the same would be treated as income in the hands of the employer u/s.2(24)(x). 40. We have heard both the parties and perused the material on record. We notice that the Hon’ble Supreme Court in the case of Checkmate Services (supra) has considered the issue of whether the employees contribution paid before due date for filing the return of income u/s.139(1) whether otherwise allowable u/s.43B, putting to rest the contradicting decisions of various High Court. The relevant extract of the decision is as given below – 52. When Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate IT(TP)A No.753/Bang/2022 Page 20 of 23 nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions – especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure. 53. The distinction between an employer’s contribution which is its primary liability under law – in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the IT(TP)A No.753/Bang/2022 Page 21 of 23 later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) - unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B. 54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non- obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under IT(TP)A No.753/Bang/2022 Page 22 of 23 Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction. 55. In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed. 41. In view of the above decision of the Hon’ble Supreme Court, we hold that the employees contribution to PF and ESI should be remitted before the due date as per explanation to section 36(1)(va) i.e., on or before the due date under the relevant employee welfare legislation like PF Act, ESI Act etc., for the same to be otherwise allowable u/s.43B. We therefore see no reason to interfere with the order of the CIT(Appeals). The grounds taken by the assessee on this issue is dismissed. 42. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 31 st day of October, 2022. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 31 st October, 2022. /Desai S Murthy / IT(TP)A No.753/Bang/2022 Page 23 of 23 Copy to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.
