2016 (9) TMI 1070 - AT - Income Tax

Treatment of foreign exchange gains earned on cancellation of forward contracts - revenue receipt or capital receipt - Held that - The fact remains that the forward contract was taken to insulate / protect the assessee from the possible loss that may be suffered due to foreign exchange fluctuation in the course of purchasing of plant and machinery. It is not in dispute that the plant and machinery which was proposed to be purchased for the purpose of setting up of plant in the State of Tamil Nadu, which is a capital asset. When the assessee cancelled / suspended the setting up of plant in the State of Tamil Nadu and cancelled the forward contract, this Tribunal is of the considered opinion that the loss or gain would be relatable to the purchase of capital asset, namely, plant and machinery. Therefore, the loss or gain arose to the assessee due to cancellation of forward contract on account of foreign exchange fluctuation has to be treated as capital in nature. Merely because the assessee suspended the setting up of plant in Tamil Nadu and cancelled forward contract, that cannot be a reason to treat the gain arising on account of cancellation of forward contract as revenue receipt. Since the transaction was relatable to acquisition of capital asset, namely, plant and machinery by way of import from Japan, this Tribunal is of the considered opinion that the gain due to foreign exchange fluctuation would definitely be on the capital field. Therefore, this Tribunal is unable to uphold the order of the Assessing Officer. Accordingly, the orders of the Assessing Officer are set aside. The Assessing Officer is directed to treat the gain arising out of the foreign exchange fluctuation on account of cancellation of forward contract as capital receipt. Credit of advance tax denied - Held that - When the assessee has paid advance tax to the extent of ₹ 54,61,897/-, the same has to be given credit while computing the tax payable by the Assessing Officer. Under normal circumstances, income-tax has to be paid on the assessed income. However, the Income-tax Act provides for payment of tax on income in advance before assessment of total income. When the assessee pays the tax in advance as per the scheme of Income-tax Act, this Tribunal is of the considered opinion that the Assessing Officer has to necessarily give credit to the advance tax paid by the assessee. Accordingly, the orders of the lower authorities are set aside and the issue of advance tax credit to the extent of ₹ 54,61,897/- is remitted back to the file of the Assessing Officer. The Assessing Officer shall verify the details of advance tax paid by the assessee and thereafter give necessary credit, if the advance tax was actually paid by the assessee. Interest under Section 234C - Held that - Section 234C of the Act provides for payment of interest for deferment of advance tax. The assessee claims before this Tribunal that a sum of ₹ 54,61,897/- was paid as advance tax, however, the same was not given credit. While considering the failure of the Assessing Officer to give credit to the advance tax to the extent of ₹ 54,61,897/-, this Tribunal finds that the matter needs to be verified and the credit should be given if the assessee paid advance tax. Since the interest is levied for non-payment of advance tax and the assessee claims that the advance tax paid was not given credit, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside in respect of levy of interest under Section 234C of the Act and the issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall reexamine the issue afresh and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee. Adjustment proposed by the Dispute Resolution Panel while determining the arm s length price - comparability - Held that - Functional similarity is one of the relevant factors for the purpose of comparing the assessee s transaction with that of transaction of comparable company. If the transaction of the assessee-company with its associate enterprise is totally different from comparable companies, then the same cannot be compared instantly for the purpose of determining the arm s length price. This Tribunal is of the considered opinion that for the purpose of comparing the comparable transaction with that of transaction of assessee for the purpose of determination of arm s length price, the TPO as well as the DRP have to find out the companies which are engaged in the same or similar functions. Since the TPO as well as the DRP have not selected the companies which are engaged in the same or similar functions as that of the assessee-company, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Transfer Pricing Officer. Accordingly, the orders of the authorities below are set aside and the issue of transfer pricing adjustment is remitted back to the file of Assessing Officer. The Assessing Officer shall refer the matter once again to the Transfer Pricing Officer. The Transfer Pricing Officer shall find out the companies which are performing same or similar functions as that of the assessee-company and thereafter decide the issue in accordance with law after giving a reasonable opportunity to the assessee. It is open to the assessee to file objection to the order of the Transfer Pricing Officer. When such an objection is filed, the matter shall be referred to DRP once again to determine in accordance with law.

Summary

Issues Involved:
1. Treatment of foreign exchange gains earned on cancellation of forward contracts.
2. Failure of the Assessing Officer to give credit of advance tax.
3. Levy of interest under Section 234C of the Income-tax Act.
4. Adjustment proposed by the Dispute Resolution Panel while determining the arm's length price.

Issue-wise Detailed Analysis:

1. Treatment of Foreign Exchange Gains Earned on Cancellation of Forward Contracts:
The primary issue was whether the foreign exchange gains from the cancellation of forward contracts should be treated as capital receipts or revenue receipts. The assessee argued that the gains were capital receipts since the forward contracts were related to the import of plant and machinery, which are capital assets. The assessee cited the judgment of the Apex Court in CIT v. Tata Locomotive and Engineering Co. Ltd. to support their claim. The Department contended that since no plant and machinery were imported, the gains should be treated as revenue receipts. The Tribunal concluded that the gains should be classified as capital receipts because the forward contracts were intended to protect against foreign exchange fluctuations related to the import of capital assets. Thus, the Tribunal set aside the Assessing Officer's order and directed to treat the gains as capital receipts.

2. Failure of the Assessing Officer to Give Credit of Advance Tax:
The assessee claimed that the Assessing Officer did not give credit for advance tax paid amounting to ?54,61,897/-. The Department argued that credit would be given if the corresponding income was declared in the return. The Tribunal emphasized that credit for advance tax must be given if the tax was paid as per the Income-tax Act's provisions. The Tribunal remitted the issue back to the Assessing Officer to verify the details of the advance tax paid and give the necessary credit.

3. Levy of Interest Under Section 234C of the Income-tax Act:
The assessee contended that interest under Section 234C should be levied on the returned income, not the assessed income. The Department maintained that interest was correctly levied for non-payment of advance tax. The Tribunal noted that since the issue of advance tax credit needed verification, the levy of interest under Section 234C also required reconsideration. The Tribunal remitted the issue back to the Assessing Officer for fresh examination and decision in accordance with the law.

4. Adjustment Proposed by the Dispute Resolution Panel While Determining the Arm's Length Price:
The assessee challenged the comparables selected by the Transfer Pricing Officer (TPO) and the classification of its functions as Knowledge Process Outsourcing by the Dispute Resolution Panel (DRP). The assessee argued that none of the comparables selected by the TPO were engaged in similar functions. The Department emphasized the need to compare international transactions with uncontrolled transactions in the same financial year. The Tribunal highlighted the importance of functional similarity in selecting comparables for determining the arm's length price. The Tribunal found that the TPO and DRP did not select companies performing similar functions as the assessee. Therefore, the Tribunal remitted the issue back to the Assessing Officer to refer the matter to the TPO for reconsideration and selection of appropriate comparables.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions to the Assessing Officer to reconsider and verify the issues related to foreign exchange gains, advance tax credit, interest under Section 234C, and transfer pricing adjustments in accordance with the law. The Tribunal emphasized the need for proper verification and selection of functionally similar comparables in the transfer pricing assessment.