M/S. EIT SERVICES INDIA PRIVATE LIMTIED ,BANGALORE V. .DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(2)(1), BANGALORE

ITTPA 1580/BANG/2024

AI Insights

The case involves EIT Services India Private Limited appealing against the order of the Income Tax Department, which included an addition of \\u20b93,23,90,157 as notional interest on overdue receivables from associated enterprises and disallowed CSR expenses claimed under Section 80G. The Tribunal found that the TPO's adjustment for notional interest should be re-examined, particularly comparing the debtor's holding period of the assessee with that of comparable entities. Regarding CSR expenses, the Tribunal noted that such expenses, even if mandatory under the Companies Act, could qualify as donations under Section 80G if made to approved institutions, and thus should not be disallowed.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 474084 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 17-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2020-2021
• Other Referred Cases: ON Semiconductor Technology India Private Limited vs. DCIT, Allegis Services India (P.) Ltd. v. Assistant CIT
• Laws Referred To: Income Tax Act, Companies Act 2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BIJU M.K
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Set aside; Business income; Transfer pricing; International transaction; Depreciation; TDS; Notional interest; Charitable institution; Ineligible deduction
• Section: 32; 92CA; 37; 37(1); 80G

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No.1580/Bang/2024 Assessment Years : 2020-21 EIT Services India Private Limited, #39/40, Digital Park, Electronic City Phase II, Hosur Road, Bengaluru – 560 100. PAN – AAACD 4078 L Vs. The Dy. Commissioner of Income Tax, Circle – 2(2)(1), Bengaluru. APPELLANT RESPONDENT Assessee by : Shri Padam Chand Khincha, CA Revenue by : Shri Biju M.K, CIT (DR) Date of hearing : 17.10.2024 Date of Pronouncement : 17 .12.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the Income Tax Department dated 21/06/2024 in ITA No.ITBA/AST/S/143(3)/2024-25/1065988665(1) for the assessment year 2020-21. IT(TP)A No.1580/Bang/2024 Page 2 of 12 . 2. The issue raised by the assessee in ground No. 1 is general in nature and therefore the same does not require any separate adjudication. Hence, we dismiss the same as infructuous. 3. At the outset, the learned counsel appearing on behalf of the assessee submitted that he has been instructed not to press the issue raised in ground No. 2 filed on the memo of appeal. Accordingly, we dismiss the same as not pressed. 3.1 The interconnected issue by the assessee in ground Nos. 3 and 4 is that the learned DRP/AO/TPO erred in confirming the addition of ₹3,23,90,157 on account of notional interest to be charged on overdue receivables from the AE. 3.2 During the proceedings, the TPO observed that the assessee had reported receivables from associated enterprises, which appeared to represent interest-free loans disguised as delayed receivables. According to the TPO, such receivables from associated enterprises constitute an international transaction that must be determined at arm's length price under the provisions of section 92CA of the Act. Consequently, the TPO computed the arm's length interest on the outstanding receivables at ₹3,239,0157 and made an upward adjustment to the total income of the assessee. 3.3 The assessee raised objections before the learned DRP but did not succeed. Consequently, the DRP upheld the findings of the TPO. IT(TP)A No.1580/Bang/2024 Page 3 of 12 . 4. Aggrieved by the order of the ld. DRP/ TPO/ AO, the assessee has filed an appeal before us. 5. The learned AR submitted an appeal book spanning pages 1 to 826, along with appeal papers and case law citations. The ld. AR contended that the receivables arose from services rendered by the assessee to the AE. Furthermore, the transaction between the assessee and the AE for these services had already been benchmarked by selecting appropriate comparables. According to the ld. AR, the interest on overdue receivables should also be benchmarked using the same comparables. The AR provided details showing that the average outstanding period of the comparables was 69 days, whereas the assessee’s average outstanding period was only 40.43 days. Based on these details, the AR argued that no adjustment was warranted under the given circumstances. 5.1 Conversely, the learned Department Representative supported the findings of the authorities below. 6. We have considered the rival contentions of both parties and reviewed the materials on record. At the outset, we note that an identical issue has been decided by the ITAT Bangalore Bench in the case of ON Semiconductor Technology India Private Limited vs. DCIT, reported in 142 Taxmann.com 483. The relevant excerpt states: 24. We have heard rival submissions and perused the material on record. The details with respect to the terms of the Master Service Agreement, credit period allowed thereunder, invoicing details, the realization data, and such other particulars as may be relevant to adjudicate on this issue, are not emanating from the DRP's directions/TPO's order. We accordingly direct the AO/TPO to examine the factual aspect. The AO/TPO is also directed to examine computation of debtors holding period of comparable vis-à-vis that of the IT(TP)A No.1580/Bang/2024 Page 4 of 12 . assessee. If the debtors holding period of comparable is higher than that of the assessee, then prima facie, no TP adjustment is required on the amounts outstanding from the AEs. We, accordingly, allow the ground 6.1 to 6.6 for statistical purposes. 6.1 During the hearing, the learned counsel for the assessee relied on the cited ITAT order and prayed for the similar direction in the case on hand which was not opposed by the ld. Department Representative. Accordingly, in line with the aforementioned decision and in the interest of justice and fair play, we set aside the issue to the file of the TPO for fresh adjudication, applying the principles established in the cited case and adhering to the provisions of law. Before parting, it is necessary to note that the TPO while calculating the interest on the outstanding receivables, if any, should limit the same up to the end of the financial year. Hence, the ground of appeal of the assessee is allowed for statistical purposes. 7. The next issue raised by the assessee in ground 5 of its appeal is that the learned DRP/AO erred in disallowing corporate social responsibility expense for Rs. 7,64,02,037/- claimed as deduction under section 80G of the Act. 7.1 The assessee during the year under consideration incurred expenditure of Rs. 15,28,04,073/- on account Corporate Social Responsibility (CSR) as mandated by section 135 of companies Act 2013. The assessee while computing the business income under the Act, disallowed the entire amount of CSR expenditure in accordance with the provision of section 37 of the Act. However, the assessee claimed that the CSR expenses amount is eligible for deduction under section 80G of the Act for Rs. 7,64,02,037/- representing the amount of donation which IT(TP)A No.1580/Bang/2024 Page 5 of 12 . was contributed/donated to the specified fund or charitable institution under section 80G of the Act and eligible for deduction @ 50% of the sum donated. Thus, the assessee while computing total income chargeable to tax claimed deduction under section 80G of the Act for an amount of Rs. 7,64,02,037/- being 50% of amount donated. 7.2 However, the AO disagreed with the contention of the assessee. The AO held that deduction under section 80G of the Act available for the sum paid as donation. The term donation refers to an amount paid voluntary by a person. On the other hand, CSR is mandatory not voluntary. Therefore, amount incurred on account of compulsion under the provision of section 135 of the companies cannot be said as donation. The AO further observed that the CSR made compulsory with view to share the burden of Government by the certain class of corporate. If any deduction on such expenditure of CSR activity is allowed as deduction under the provision of the Act, then the purpose of sharing the burden of Government will defeat. Therefore, the legislator vide Finace Act 2014 inserted an explanation 2 to section 37 of the Act and explained the expenditure incurred on CSR cannot be allowed as deduction. Similarly vide Finance Act 2015 some of the clauses of section 80G of the Act (such as sub-clause (iiihk) & (iiihl) of clauses (a) of section 80G(2) of the Act) also amended wherein it was specified sum paid by the assessee as donation to “the Swachh Bharat Kosh or the Clean Ganga Fund out of CSR will not eligible for deduction. The AO based on the above proposed to disallow the claim of the assessee made under section 80G of the Act. IT(TP)A No.1580/Bang/2024 Page 6 of 12 . 8. The aggrieved assessee preferred to file objections before the learned DRP. The learned DRP vide direction dated 22-05-2024 confirmed the finding of the AO by observing as under: “2.17.1 Having perused the facts of the case and submission made by the assessee, it was seen by the panel that during the year under consideration the assessee has donated an amount of Rs. 15,28,04,073/- and claimed the same as CSR expense. However, the company has claimed deduction of 50% of this amount as eligible donation under section 80G. 2.17.2 The Panel is of the view that the donation made by taxpayers from expenditure should not be eligible for deduction u/s 80G of the IT Act, 1961. In this regard, it is pertinent to mention here about Memorandum to the Finance (no 2) Act , 2014. Wherein it was mentioned that the objective of CSR is to share burden of Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are as tax deduction, this would result in subsidizing . of around one third of such expenditure. The existing provision of section 37(1) of the IT Act provide that deduction of and expenditure, which has not mentioned specifically in sec. 30 to 36 of the Act shaft be allowed if the same is incurred wholly and exclusively for the purpose of carrying on any business car profession. As the CSR expenditure is not incurred for the purpose of carrying on business. Such expenditure cannot be allowed as under the existing provisions of section 37 of the IT Act. Hence, interpretation of Memorandum to the Finance (no 2) Act, 2014 can also be extended for deduction is BOG of the CSR expenditure as allowing the same will defeat the primary purpose of introducing CSR i.e. sharing of burden of Government. 2.17.3 In view of the above, the Panel finds no infirmity in the action of the AO of disallowing deduction u/s BOG of the Act, Accordingly, this ground of objection is hereby rejected.” 9. Being aggrieved by the direction/ order of learned DRP/ AO, the assessee is in appeal before us. IT(TP)A No.1580/Bang/2024 Page 7 of 12 . 10. The learned AR before us contended the assessee cannot be denied the benefit of section 80G of the Act for the donation paid to the eligible organization approved under section 80G of the Act despite such payment was made to comply the CSR activities. 11. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 12. We have heard the rival contentions of both the parties and perused the materials available on record. The issue revolves around whether CSR-related donations made to specified funds or charitable institutions, which qualify under Section 80G of the Act, can be claimed as deductions despite the mandatory nature of CSR expenditure under Section 135 of the Companies Act, 2013, and its disallowance as a business expense under Section 37(1) of the Act. In this regard we note that Section 37(1) pertains solely to the computation of income from business or profession, and its scope is confined to allowing or disallowing expenditures incurred for business purposes. On the other hand, Section 80G provides deductions for donations made to specified funds and institutions while computing the total income of the assessee. The disallowance of CSR expenditure under Explanation 2 to Section 37(1) applies only in the context of determining business income and does not preclude an assessee from claiming deductions under Chapter VIA (which includes Section 80G) for eligible donations subject to the conditions specified therein. 21.1 While CSR expenditure is mandatory under Section 135 of the Companies Act, 2013, the assessee retains discretion over the recipients IT(TP)A No.1580/Bang/2024 Page 8 of 12 . of such contributions. When such contributions are made to approved institutions or funds under Section 80G of the Act, they qualify as \"donations\" for the purposes of that section, even if incurred under a statutory obligation. The term \"donation\" under Section 80G includes both voluntary contributions and mandatory payments made to specified entities. The mandatory nature of CSR expenditure does not dilute its eligibility for deduction under Section 80G of the Act, as the deduction depends on the nature of the recipient and compliance with conditions specified in Section 80G of the Act. 12.2 The AO cited the Finance Act, 2015, which specified that contributions made under CSR to certain funds like the Swachh Bharat Kosh and the Clean Ganga Fund would not be eligible for deduction under Section 80G of the Act. These amendments apply only to specific funds and do not impose a blanket restriction on deductions for all CSR- related donations under Section 80G of the Act. Contributions to other approved charitable funds or institutions remain eligible for deduction if the conditions under Section 80G are met. 12.3 We also note that the coordinate bench of this Tribunal in case of Allegis Services India (P.) Ltd. v. Assistant CIT bearing ITA No. 1693/Bang/2019 order dated 29-4-2020, involving identical issue has decided as under: '10. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 1-4-2014. Finance (No.2) Act, 2014 inserted new Explanation 2 to sub-section (1) of section 37, so as to clarify that for purposes of sub-section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporatesocialresponsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. 11. This amendment will take effect from 1-4-2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years. IT(TP)A No.1580/Bang/2024 Page 9 of 12 . 12. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head 'Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income-tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under: \"The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporatesocialresponsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein.\" 13. From the above it is clear that under Income-tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, \"Income from Business and Profession\" to those, who pursue corporatesocialresponsibility projects under following sections. ♦ Section 30 provides deduction on repairs, municipal tax and insurance premiums. ♦ Section 31, provides deduction on repairs and insurance of plant, machinery and furniture. ♦ Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know-how, patents, trademarks, licenses. ♦ Section 33 allows development rebate on machinery, plants and ships. ♦ Section 34 states conditions for depreciation and development rebate. ♦ Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section. ♦ Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government. IT(TP)A No.1580/Bang/2024 Page 10 of 12 . ♦ ?Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax. ♦ Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under: ♦ Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available. (a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister's National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1)(i). (b) Donations with 50% deduction are also available under section 80G for all those sums that do not fall under section 80G(1)(i). Under section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s 80G. 14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession\", where as monies spent under section 80G are claimed while computing \"Total Taxable income\" in the hands of assessee. The point of claim under these provisions are different. 15. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under sections 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under sections 30 to 36 of the Act, for computing income under the head, \"Income from Business and Profession\". 16. For claiming benefit under section 80G, deductions are considered at the stage of computing \"Total taxable income\". Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, \"Income form Business and Profession\". The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing \"Total Taxable Income\" cannot be denied to assessee, subject to fulfilment of necessary conditions therein. 17. We therefore do not agree with arguments advanced by Ld.Sr.DR. 18. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, \"Income from Business and Profession\". It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing \"Total taxable income\", which has been IT(TP)A No.1580/Bang/2024 Page 11 of 12 . disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing 'Total Taxable Income\". If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature. 19. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.' 12.4 In view of the above elaborated discussion and following the finding of coordinate bench in the above-mentioned case, we hereby set aside the finding of learned DRP and direct the AO to delete the addition made by him subject to the compliance to the provisions of section 80G of the Act. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes. 13. The next issue raised by the assessee in ground No. 6 is that the AO has granted short benefit of TDS amounting to ₹ 3,56,930 without assigning any reason. Accordingly, the Ld. AR before us submitted that a direction can be issued to the AO for granting the benefit of TDS in toto as per the provisions of law. The learned DR on the other hand did not raise any objection if such direction is given to the AO for granting the benefit of TDS as per the provisions of law. In view of the above, we direct the AO to grant the benefit of the TDS to the assessee after necessary verification as per the provisions of law. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes. 14. The issues raised by the assessee in ground No. 7 are consequential in nature and therefore the same do not require any separate adjudication. Accordingly, we dismiss the same as infructuous. IT(TP)A No.1580/Bang/2024 Page 12 of 12 . 15. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in court on 17th day of December, 2024 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 17th December, 2024 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "