2023 (4) TMI 983 - AT - Income Tax

TP Adjustment - computation of arms length price in relation to alleged international transactions with 100% subsidiary of the assessee company - addition on account arms length price of loan interest - HELD THAT - Since ITAT has decided the issue against the assessee on identical facts in assessee s own case for assessment year 2008- 09 2017 (4) TMI 1009 - ITAT AHMEDABAD the ground nos. 1 2 of the assessee s appeal are dismissed accordingly. Addition by charging interest @ 7.14% - HELD THAT - We observe that the ITAT in the assessee s own case for assessment year 2008-09 2017 (4) TMI 1009 - ITAT AHMEDABAD has decided the issue by holding that the ALP adjustment is required to be made on the basis of Libor 2%. Addition on account of disallowance 1/5th of GDR issue expenses claimed by the company as allowable deduction u/s. 35D - HELD THAT - The issue has been decided against the assessee by Hon ble ITAT for assessment year 2008-09 2017 (4) TMI 1009 - ITAT AHMEDABAD as held that one of the conditions in Section 35D(1), as it stood at the material point of time, is that either the eligible expenses should be incurred before the commencement of the business, and, in a situation in which the expenses are incurred after the commencement of business, the expenses should be incurred for extension of his undertaking or setting up of a new industrial undertaking. This condition is clearly not satisfied on the facts of the present case as the expenses are incurred after the commencement of the business and it is not even assessee's case that the expenses are incurred for extension of his undertaking or for setting up of new industrial undertaking. - Decided against assessee. Disallowance of modified value added tax (MVAT) - HELD THAT - CIT(A) has not erred in facts and in law in dismissing the assessee s appeal. The assessee has not been able to give any evidence in support of his contention that he had incorrectly debited the aforesaid sum to the MVAT receivable account and the assessee has also not been able to establish that there is no credit available in the MVAT receivable account other than wrongly debited entry of Rs. 11,76,706/- for adjustment against purchase when the MVAT receivable account was written off. It is also not clear as to when the assessee came to realize that credit of MVAT was not available to him.- Decided against assessee. Addition on account of foreign exchange derivatives loss while treating it as speculative in nature - HELD THAT - The issue has now been decided in favour of the assessee by ITAT in assessee s own case for assessment year 2008-09 2017 (4) TMI 1009 - ITAT AHMEDABAD on identical set of facts, and accordingly the appeal is to be disposed of in light of the aforesaid order as held all the derivate transactions are specific hedging transactions against foreign exchange transactions of the assessee and are to be treated as integral part of the business transactions of the assessee. These transactions, by no stretch of logic, cannot be treated as standalone transactions, and as such loss on these transactions cannot be treated as loss from speculation business ineligible for set off against normal business profits. As for the CBDT instruction relied upon by the Assessing Officer, such instructions do not bind the appellate authorities, and nothing, therefore, turns on the same- so far as our adjudication is concerned. The losses on account of foreign exchange contracts are bonafide expenses incurred in furtherance of legitimate business interests of the assessee and are to be allowed as deduction under section 37(1) - Decided in favour of assessee. Late remittance of employees contribution towards EPF and ESI u/s 36(1)(va) - HELD THAT - In our view, the issue is squarely covered against the assessee by the order of Hon'ble Supreme Court in the case of Harrisons Malayalam Ltd. 2023 (1) TMI 137 - SC ORDER as held where assessee-company failed to pay employees contribution towards EPF and ESI within due date prescribed in respective Acts, deduction under section 36(1)(va) was not allowable. Decided against assessee. Disallowance of loss on account of foreign currency fluctuation on loan for working capital - CIT-A deleted the addition - HELD THAT - As in the remand proceedings, when the Ld. CIT(A) referred the file back to the AO for his comments on this issue, the AO only relied upon the Supreme Court decision in the case of Goetze India Ltd 2006 (3) TMI 75 - SUPREME COURT and did not point out any factual or legal infirmity in the claim of loss by the assessee. Further, we find no infirmity in the order of Ld. CIT(A), who on appreciation of the facts of the case of the assessee allowed the assessee s appeal on the ground that the loss on foreign currency loan is on revenue account. As in the case of PCIT v. Vedanta Ltd. 2023 (1) TMI 72 - SC ORDER SLP dismissed against order of High Court that losses incurred by assessee-company due to foreign exchange fluctuation on export proceeds was to be allowed as business expenditure under section 37(1) - Decided in favour of assessee. Disallowance of loss on account of MTM loss in exports - CIT-A deleted the addition - HELD THAT - In the case of Emmsons International Ltd. 2019 (10) TMI 761 - ITAT DELHI where assessee engaged in business of international trading in commodities, suffered foreign currency loss on foreign exchange forward contracts, loss so incurred was to be allowed as business loss. Also in the case of Quality Engineering Software Technologies (P.) Ltd. 2015 (1) TMI 869 - ITAT BANGALORE where assessee-company entered into forward contracts in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds and there was an actual contract for sale of merchandise, said transaction would not qualify to be called as speculative transaction and therefore, provision for losses incurred on derivative contracts was an allowable expenditure. Decided in favour of assessee. Disallowance of loss on account of retrenchment compensation paid to workers - CIT-A deleted the addition - HELD THAT - From the facts placed before us and the observations of ld. CIT(A), we find no infirmity in the order of ld. CIT(A) with respect to this ground of appeal so as to interfere with the same. Notably, even the Assessing Officer in the assessment order for succeeding assessment year 2010-11 has allowed the assessee s claim of expenditure of retrenchment compensation paid to the employees. Addition made being 1/5th of the expenditure of ICICI loan processing fees - CIT-A deleted the addition - HELD THAT - Department has itself accepted the assessee s claim of allowance of 1/5th of the expenditure. Department has not brought forth any change in facts relating to this assessment year as compared to previous assessment years. The ld. Departmental Representative has further not challenged the genuineness of expenses. Accordingly, we find no infirmity in the order of ld. CIT(A) so as to call for any interference. TDS u/s 194C - Disallowance u/s 40(a)(ia) - non deduction of TDS on payments made to three parties - assessee contended that all these parties were having PAN and therefore TDS was not required to be deducted - HELD THAT - Before us, assessee submitted that there was no requirement to deduct tax at source under s 194C(6) of the Act on account of TDS on freight expenses since the three parties were having PAN and also were in possession of less than 10 vehicles and therefore there was no requirement to deduct tax at source under s 194C(6) of the Act. Before us, the counsel for the assessee also produced details of PAN of the aforesaid parties - we observe that since the above details were not produced for verification before either the Ld. CIT(A) or the AO, in the interest of justice, this issue is being set aside to the file of AO to carry out the necessary verification.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Arms Length Price of Loan Interest
3. Disallowance of GDR Issue Expenses
4. Disallowance of MVAT
5. Foreign Exchange Derivatives Loss
6. Late Remittance of Employee's Contribution to PF and ESIC
7. Loss on Foreign Currency Fluctuation on Loan for Working Capital
8. MTM Loss in Exports
9. Retrenchment Compensation
10. Disallowance of Loan Processing Fees
11. Disallowance Under Section 40(a)(ia) of the Act

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the Assessing Officer's action of referring the case to the Transfer Pricing Officer for computation of the arms length price in relation to alleged international transactions with its 100% subsidiary. The ITAT dismissed the appeal, citing previous rulings against the assessee for similar issues in earlier assessment years (2008-09).

2. Arms Length Price of Loan Interest:
The CIT(A) confirmed the addition made by the Assessing Officer on account of arms length price of loan interest. The assessee's appeal was dismissed based on the ITAT's earlier decisions against the assessee for the assessment year 2008-09. However, the ITAT allowed the appeal regarding the interest rate, holding that the adjustment should be based on LIBOR plus 2%.

3. Disallowance of GDR Issue Expenses:
The CIT(A) confirmed the disallowance of 1/5th of GDR issue expenses claimed by the company as allowable deduction under section 35D of the Act. The ITAT dismissed the appeal, following its earlier decision against the assessee for the assessment year 2008-09.

4. Disallowance of MVAT:
The CIT(A) confirmed the addition made by the Assessing Officer on account of disallowance of MVAT. The ITAT upheld the CIT(A)'s decision, noting that the assessee failed to provide evidence supporting the claim that the MVAT receivable account was incorrectly debited.

5. Foreign Exchange Derivatives Loss:
The CIT(A) confirmed the disallowance of foreign exchange derivatives loss, treating it as speculative in nature. The ITAT allowed the appeal, referencing its decision for the assessment year 2008-09, which held that such losses are integral to the business and not speculative.

6. Late Remittance of Employee's Contribution to PF and ESIC:
The CIT(A) confirmed the addition on account of late remittance of employee's contribution to PF and ESIC under section 36 (1) (va) of the Act. The ITAT dismissed the appeal, citing the Supreme Court's decisions that such contributions must be deposited within the due date prescribed in the respective Acts.

7. Loss on Foreign Currency Fluctuation on Loan for Working Capital:
The CIT(A) deleted the disallowed loss on account of foreign currency fluctuation on loan for working capital, treating it as a revenue expenditure. The ITAT upheld the CIT(A)'s decision, referencing the Supreme Court's ruling that such losses are allowable as business expenditure under section 37(1) of the Act.

8. MTM Loss in Exports:
The CIT(A) deleted the disallowed MTM loss related to foreign currency forward contracts on account of exchange rate difference for exports. The ITAT upheld the CIT(A)'s decision, citing precedents that such losses are allowable as business expenditure.

9. Retrenchment Compensation:
The CIT(A) deleted the disallowed retrenchment compensation paid to workers, treating it as a business expense. The ITAT upheld the CIT(A)'s decision, referencing similar allowances in subsequent assessment years and relevant case law.

10. Disallowance of Loan Processing Fees:
The CIT(A) deleted the disallowed 1/5th of the expenditure of ICICI loan processing fees, treating it as deferred revenue expenditure. The ITAT upheld the CIT(A)'s decision, noting that the Department had accepted similar claims in previous assessment years.

11. Disallowance Under Section 40(a)(ia) of the Act:
The CIT(A) confirmed the disallowance under section 40(a)(ia) of the Act due to non-deduction of TDS. The ITAT set aside the issue to the AO for verification, noting that the assessee provided PAN details of the parties involved, which were not previously verified.

Conclusion:
The appeals of the assessee were partly allowed, and the appeal of the Department was dismissed. The ITAT's decisions were consistent with previous rulings and relevant case law, ensuring adherence to established legal principles.