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2017 (4) TMI 1406 - AT - Income TaxDisallowance being notional loss on outstanding forex derivatives contracts - Held that - The assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. AO has not even raised any issues with respect to the above. His case is confined to the loss being notional in nature and contrary to the CBDT guidelines. As for the CBDT instructions, it is only elementary that any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee. As per the details filed by the assessee, the foreign exchange contracts have been entered into for genuinely restricting its bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transactions. These transactions are integral part of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. We uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance on account of loss, at the end of the year, on foreign exchange contracts. Granting the deduction u/s 80IB on duty draw back - Held that - LR agree that this issue is required to be remitted to the file of the Assessing Officer, as similar issue in assessee s own case for the assessment year 2007-08, which is now reported as Suzlon Energy Ltd. v. Asstt. CIT 2015 (9) TMI 1115 - ITAT AHMEDABAD has been remitted to the file of the Assessing Officer for fresh adjudication. We, accordingly, remit the matter to the file of the Assessing Officer on this issue. The same observations, as made by the coordinate bench in the said order, will apply mutatis mutandis here as well. Grievance of the appellant is thus allowed for statistical purposes. Granting the deduction u/s 80IB on interest income on FD/ICD - Held that - Learned representatives agree, this issue is also covered by a coordinate bench decision in assessee s own case for the assessment year 2005-06 and 2006-07 wherein it is held that only net interest is to be excluded. We see no reasons to take any other view of the matter for this assessment year. Accordingly, the matter is remitted to the file of the Assessing Officer with the direction to exclude only net interest. Grievance of the appellant is thus allowed for limited statistical purposes as indicated here. Deduction u/s 80IB on interest income received from debtors - Held that - the issue is covered in favour of the assessee. Hon ble jurisdictional High Court, in the case of Nirma Industries Ltd. v. Dy. CIT 2006 (2) TMI 92 - GUJARAT HIGH COURT has held that interest income from debtors is not to be excluded in computation of deduction under section 80IB. The same is the stand taken by a coordinate bench in assessee s own cases for the assessment years 2006-07 and 2007-08. We, therefore, confirm the relief given by the CIT (A) on this point. Upward adjustment u/s. 92CA(3) on account of guarantee fee on loans availed by AEs of Assessee against guarantee of Assessee - Held that - We hold that the assessee extending corporate guarantees to its AEs, particularly on the facts and in the circumstances of this case and when the assessee has done so in the course of its stewardship activities for its subsidiaries, does not constitute an international transaction, and, as such, no ALP adjustment can be made in respect of the same. Accordingly, entire ALP adjustment stands deleted. As for the quantum of this adjustment, which is mainly the subject matter of grievance raised in revenue s appeal, once the entire ALP adjustment stands deleted, that aspect of the matter is wholly academic and does not call for any adjudication by us. Tax credit - Held that - So far as the receipts of fees for technical services during the financial year 2006-07, which can only be relevant for the assessment year 2007-08, are concerned, the related tax withholding in China cannot be subject matter of tax credit in the assessment year 2008-09 i.e. the assessment year before us. To this extent, learned CIT (A) does appear to be clearly in error, and the relief of ₹ 1,05,43,697 granted on account of tax credit is quite questionable. However, as this discrepancy was discovered only at the stage of finalizing this order, and as there was no occasion for us to hear the assessee on the same, we would remit this issue for fresh adjudication by the CIT (A), rather than holding it against the assessee. While deciding the matter afresh, CIT (A) will take into account our above observations, give yet another opportunity of hearing to the assessee and will deal with the matter by way of a speaking order. Disallowance u/s 14A - Held that - So far as the disallowance of interest is concerned, there is a categorical finding to the effect that the investments have been made out of interest free funds inasmuch as the interest free funds available to the assessee are far in excess of the investments in Indian subsidiaries, dividends from which are tax exempt. As regards the administrative expenses, the issue is now settled against the assessee. However, what is relevant for this purpose is the average investments in Indian subsidiaries. That is precisely what has been done in this case. Learned representatives do not dispute that the facts and circumstances of the present year are materially the same as in the earlier year decided by the Tribunal, as above. We, therefore, confirm the disallowance under section 14A to the extent of administrative expenses (i.e. ₹ 2,18,95,294) and delete the disallowance under section 14A to the extent of interest expenses (i.e. ₹ 5,09,31,854). Grievance of the assessee is thus partly upheld.
Issues Involved:
1. Disallowance of notional loss on outstanding forex derivatives contracts. 2. Deduction under section 80IB on duty drawback, interest income on FD/ICD, and interest income from debtors. 3. Upward adjustment under section 92CA(3) on account of guarantee fee on loans availed by AEs. 4. Tax credit for foreign taxes paid. 5. Disallowance under section 14A for expenses related to exempt income. Issue-wise Detailed Analysis: 1. Disallowance of Notional Loss on Outstanding Forex Derivatives Contracts: The Assessing Officer (AO) disallowed a notional loss of ?22,15,55,371 on outstanding forex derivatives contracts, arguing that the loss had not crystallized and was only notional. The CIT (A) deleted this disallowance, citing the Supreme Court's judgment in CIT v. Woodward Governor India (P.) Ltd. [312 ITR 254 (SC)], which allowed the deduction of such losses under mercantile accounting. The Tribunal upheld the CIT (A)'s decision, emphasizing that anticipated losses, if reasonably quantified, are deductible, and the assessee had consistently followed accounting standards. 2. Deduction under Section 80IB: (a) Duty Drawback: The Tribunal remitted the issue back to the AO for fresh adjudication, following a similar decision in the assessee's case for the previous year. (b) Interest Income on FD/ICD: The Tribunal directed the AO to exclude only net interest, consistent with decisions in the assessee's own case for earlier years. (c) Interest Income from Debtors: The Tribunal upheld the CIT (A)'s decision, following the jurisdictional High Court's ruling in Nirma Industries Ltd. v. Dy. CIT [283 ITR 402 (Guj.)], which held that such interest income is not to be excluded in computing deduction under section 80IB. 3. Upward Adjustment under Section 92CA(3) on Account of Guarantee Fee: The AO made an upward adjustment of ?53,79,38,187 for guarantee fees on loans availed by AEs. The CIT (A) partly upheld the adjustment, adopting a 0.75% guarantee fee based on an external CUP (ICICI Bank's rate). The Tribunal, however, deleted the entire ALP adjustment, following its decision in Micro Ink v. Asstt. CIT [176 TTJ 8 (Ahd.)], which held that issuance of corporate guarantees does not constitute an international transaction under section 92B. 4. Tax Credit for Foreign Taxes Paid: The AO rejected the assessee's claim for tax credit on foreign taxes paid, as it was not claimed in the original or revised return. The CIT (A) allowed the claim, but the Tribunal remitted the matter back to the CIT (A) for fresh adjudication, noting the need for detailed examination of whether tax credit can be given against MAT payment and the impact of subsequent credits under section 115 JAA. 5. Disallowance under Section 14A for Expenses Related to Exempt Income: The AO disallowed ?7,28,27,148 under section 14A read with Rule 8D. The CIT (A) upheld the disallowance. The Tribunal, following its decision in the assessee's case for earlier years, deleted the disallowance of interest expenses (?5,09,31,854) but upheld the disallowance of administrative expenses (?2,18,95,294), noting that the investments were made out of interest-free funds. Conclusion: Both the appeals were partly allowed, with the Tribunal providing detailed directions for fresh adjudication on certain issues and upholding the CIT (A)'s decisions on others. The Tribunal emphasized the importance of consistent accounting practices and adherence to judicial precedents in determining the allowability of deductions and adjustments.
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