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2020 (5) TMI 531 - AT - Income TaxTP Adjustment - determining ALP of royalty paid - HELD THAT - Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2007-08 2018 (3) TMI 423 - ITAT DELHI we are of the considered view that CIT (A) has rightly deleted the adjustment made by the ld. TPO while determining the ALP and royalty paymen for its Tajola plant as nil because when it is not in dispute that the expenditure or payment of royalty has been paid / incurred for the purpose of business, it cannot be disallowed on the ground that it has failed to generate any economic value for the taxpayer s business - it is not the duty of the ld. TPO to advise the taxpayer company as to how the business affairs are to be run. So, when the taxpayer has successfully proved that it has received patented technology and support for the manufacturing of float glass from AGC Japan in lieu of royalty payment, the same cannot be disallowed on the basis of conjectures and surmises. So, ld. CIT (A) has rightly deleted the addition. MAT Computation - Addition on account of provision for gratuity to book profit u/s 115JB - HELD THAT - Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case 2018 (3) TMI 423 - ITAT DELHI we are of the considered view that by now, it is settled proposition of law that when provision for gratuity is being made on the basis of actuarial valuation, it cannot be said to be an unascertained liability and added in terms of clause (c) of section 115JB of the Act and as such, the said amount would not be added to the net profit. So, we find no illegality or perversity in the deletion made by the ld. CIT (A), hence ground no.2 of Revenue s appeal is deleted. Addition u/s 14A read with Rule 8D - disallowance under the normal provisions of the Act as well as u/s 115JB - CIT (A) contended that since the taxpayer has suo motu disallowed u/s 14A of the Act on account of expenses incurred to earn the dividend income of ₹ 7,47,820/-, no further disallowance can be made as the AO has not recorded any satisfaction if the working given by the taxpayer is not correct - HELD THAT - This issue is also required to be restored to AO to decide afresh in view of the decision relied upon by the ld. AR for the taxpayer referred in the preceding paras. So, this ground is allowed for statistical purposes. Disallowance of gross MTM loss - addition relying upon Instruction No.3/2010 dated 23.03.2010 by treating MTM loss as a notional loss being contingent in nature - HELD THAT - As relying on BANK OF BAHRAIN KUWAIT 2010 (8) TMI 578 - ITAT, MUMBAI when MTM gain is being taxed by the department in respect of such unmatured forward foreign exchange contracts then there was no ground to disallow the loss as claimed by the taxpayer in respect of the same contracts on the same footing. The entire detail is there on record. Even otherwise, the obligation accrued against the taxpayer the minute it entered into forward foreign exchange contracts. So, the forward foreign exchange contracts debited to the profit loss account are allowable one being the liability having been crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty. Foreign currency gain - disallowance on the ground that taxpayer did not furnish any supporting document in respect of its claim to prove that the gain of reinstatement of liability of Foreign Currency Loan External Commercial Borrowing taken for acquiring capital goods by applying the provisions contained u/s 43A - HELD THAT - The coordinate Bench of the Tribunal in the case of Vodafone East Ltd. Ors. vs. ACIT . 2009 (4) TMI 4 - SUPREME COURT by relying upon the decision rendered by Hon ble Supreme Court in case of CIT vs. Woodward Governor of India Pvt. Ltd.. 2009 (4) TMI 4 - SUPREME COURT decided the identical issue in favour of the taxpayer. Disallowance on account of provision for gratuity under the normal provisions - gratuity has been added to the taxable income under the normal provisions of the Act - HELD THAT - When provisions of gratuity has been made on accrual basis it is not an unascertained liability rather an ascertained liability which aspect has not been examined by the ld. CIT (A), so the issue is remanded back to the ld. CIT (A) to decide afresh accordingly after providing an opportunity of being heard to the taxpayer, in view of the order passed by the Tribunal in taxpayer s own case for AY 2007-08 2018 (3) TMI 423 - ITAT DELHI . So, ground no.4 is determined in favour of the taxpayer for statistical purposes.
Issues Involved:
1. Determination of Arm's Length Price (ALP) of Royalty Payment. 2. Addition on account of provision for gratuity to book profit under section 115JB. 3. Disallowance under section 14A read with Rule 8D. 4. Addition on account of Mark to Market Loss. 5. Disallowance of foreign currency gain under section 43A. 6. Disallowance of provision for gratuity under normal provisions of the IT Act. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) of Royalty Payment: The Revenue challenged the deletion of the adjustment made by the Transfer Pricing Officer (TPO) regarding the ALP of royalty paid for the Taloja Plant. The TPO had reduced the royalty payment to nil, asserting that the licensed technology did not generate economic value for the taxpayer's business. The CIT(A) deleted this adjustment, noting that the taxpayer demonstrated that the Taloja plant received patented technology and support from Asahi Glass Company, Japan, and no independent company would provide such services free of charge. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenditure for business purposes cannot be disallowed merely because it did not generate economic value. The Tribunal cited a previous decision in the taxpayer's case for AY 2007-08, which had similar findings. 2. Addition on account of provision for gratuity to book profit under section 115JB: The Revenue contested the deletion of the addition made by the AO on account of provision for gratuity. The AO had added the provision for gratuity to the book profit under section 115JB, considering it an unascertained liability. The CIT(A) deleted the addition, and the Tribunal upheld this decision, referring to the Tribunal's previous ruling for AY 2007-08, which stated that a provision for gratuity made on actuarial valuation is an ascertained liability and should not be added to the net profit under section 115JB. 3. Disallowance under section 14A read with Rule 8D: The taxpayer challenged the disallowance made under section 14A read with Rule 8D, which was confirmed by the CIT(A). The taxpayer argued that it had already disallowed an amount suo motu and that the AO did not record any dissatisfaction with the taxpayer's calculation. The Tribunal restored the issue to the AO for reconsideration, directing the AO to decide afresh in light of relevant judicial precedents. 4. Addition on account of Mark to Market Loss: The taxpayer contested the addition made by the AO on account of Mark to Market (MTM) loss on forward contracts. The AO had disallowed the MTM loss, treating it as a notional loss. The Tribunal, following its previous decision in a similar case, held that when MTM gain is taxed, the corresponding loss should also be allowed. The Tribunal deleted the disallowance, recognizing that the forward foreign exchange contracts had crystallized liabilities. 5. Disallowance of foreign currency gain under section 43A: The taxpayer challenged the disallowance of foreign currency gain on reinstatement of External Commercial Borrowings (ECB) under section 43A. The CIT(A) had confirmed the disallowance, stating that the taxpayer did not furnish supporting documents. The Tribunal noted that the taxpayer had credited the foreign currency gain to the P&L account as per Accounting Standard (AS)-11 and section 43A, and such notional gain should not be construed as real income. The Tribunal deleted the addition, following its previous decision in a similar case. 6. Disallowance of provision for gratuity under normal provisions of the IT Act: The taxpayer contested the disallowance of provision for gratuity under the normal provisions of the IT Act. The CIT(A) had confirmed the disallowance, considering it an unascertained liability. The Tribunal remanded the issue back to the CIT(A) for fresh consideration, directing the CIT(A) to examine whether the provision was made on an accrual basis and, therefore, an ascertained liability. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the taxpayer's appeal for statistical purposes. The Tribunal upheld the CIT(A)'s decisions on the ALP of royalty payment and provision for gratuity under section 115JB, restored the disallowance under section 14A to the AO, deleted the additions on account of MTM loss and foreign currency gain, and remanded the issue of provision for gratuity under normal provisions back to the CIT(A).
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