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2023 (1) TMI 1008 - AT - Income TaxPremium paid in respect of hedging contracts - interest cost on ECBs - speculative transaction covered under Section 43(5) - amount paid to BTMU under currency swap contracts - HELD THAT - As in so far as the assessee is concerned, the amount paid to BTMU under currency swap contracts is nothing but interest cost on foreign currency loans. Further, as discussed earlier, the underlying transactions in relation to the currency swap contracts are the loans availed from MELCO. It is a fact on record that on repayment of loan to MELCO after the expiry of three years, the currency swap contracts with BTMU were also terminated. Therefore, in our considered opinion, the currency swap contracts are nothing but to hedge the fluctuation in foreign currency rates for protecting the assessee from the risk of paying more interest on the foreign currency loans due to exchange rate fluctuations. Therefore, in our view, the transactions relating to currency swap contracts entered by the assessee with BTMU cannot be considered to be in the nature of speculative transaction covered under Section 43(5) of the Act. In that view of the matter, the deduction claimed by the assessee is allowable under Section 36(1)(iii) of the Act. In any case of the matter, even for the sake of argument assuming that the premium paid to BTMU in respect of currency swap contracts cannot be termed as interest covered under Section 36(1)(iii) of the Act, however, there cannot be any dispute that this is an expenditure incurred by the assessee wholly and exclusively for the purpose of its business, as, such expenditure is having a direct nexus with the finance cost on external borrowings. That being the case, it is otherwise allowable as deduction under Section 37(1) of the Act. Accordingly, we delete the disallowance. TDS u/s 195 - Disallowance u/s 40(i)(a) - amount paid towards installation charges - as per AO travelling and hotel expenses, since, are in connection with rendering of technical services, they also have to be regarded as fee for technical services (FTS) - HELD THAT - From the sample copies of the bills/invoices raised on the assessee, it is observed that in so far as air-tickets and hotel bills are concerned, the payee has raised separate invoices which do not comprise of any amount charged towards installation of equipments. The perusal of invoices clearly indicates that they are towards reimbursement of cost on actual basis without any profit element embedded therein. Therefore, in our view, no part of such expenditure/cost incurred can be apportioned towards technical services. Therefore, in our view, the assessee was not required to withhold tax under Section 195 of the Act on such expenditure. Even otherwise also, the amount in dispute was not claimed as revenue expenditure by the assessee. Rather, the assessee had capitalized the amount in its accounts and has claimed depreciation. In such a scenario, the issue arising for consideration is whether section 40(a)(i) of the Act would be applicable. As we find from the decisions cited before us in this regard by learned counsel appearing for the assessee, the ratio laid down clearly says that section 40(a)(i) of the Act provides for disallowance only in respect of expenditure which are revenue in nature. Therefore, the provision does not apply to a case of the assessee whose claim is for depreciation. In this regard, we may specifically refer to the decision of Hon ble Karnataka High Court in PCIT vs. Tally Solution Pvt. Ltd. 2020 (12) TMI 1160 - KARNATAKA HIGH COURT - we delete the disallowance. Disallowance on account of difference in rent cost incurred by the assessee for providing accommodation to its employees and the respective perquisite value of such residential accommodation determined in the hands of the employees - HELD THAT - There is no dispute that the assessee had actually incurred the expenditure. In fact, the Assessing Officer has allowed the deduction to the extent of the amount treated as perquisite value at the hands of the employees. He has disallowed the excess amount. This, in our view, is unjustified. The perquisite value to be taxed at the hands of the employees is determined by applying the methodology prescribed under the rules. Therefore, it has no relation to the actual cost incurred by the assessee. In any case of the matter, if the assessee has incurred certain expenditure for welfare of the employees to keep a contended and dedicated work force, keeping in view the commercial expediency, the expenditure can be allowed under Section 37(1) of the Act - we delete the disallowance made by the assessee.
Issues Involved:
1. Disallowance of amortization of premium on derivative on long-term borrowings. 2. Disallowance under Section 40(i)(a) of the Income-Tax Act. 3. Disallowance of difference in rent cost incurred for providing accommodation to employees and the respective perquisite value. 4. Consequential and general grounds. 5. Additional ground on payment made towards education cess and higher education cess. Issue-wise Detailed Analysis: 1. Disallowance of Amortization of Premium on Derivative on Long-term Borrowings: The assessee, a corporate entity engaged in the assembly of automotive components, filed a return declaring an income of Rs. 73,20,89,000 for the assessment year 2013-14. The Assessing Officer (AO) disallowed an amount of Rs. 2,63,36,331 claimed as amortization of premium on derivative on long-term borrowings. The AO found that the assessee had availed two long-term External Commercial Borrowings (ECB) from Mitsubishi Electric Corporation (MELCO) and entered into currency swap contracts with Bank of Tokyo, Mitsubishi UFJ (BTMU) to hedge the foreign currency exposure. The AO held that the premium paid to BTMU was not covered under Section 36(1)(iii) of the Act and considered it a speculative transaction under Section 43(5) of the Act. The Tribunal disagreed with the AO, stating that the currency swap contracts were to hedge the fluctuation in foreign currency rates and protect the assessee from the risk of paying more interest due to exchange rate fluctuations. The Tribunal held that the transactions were not speculative and the deduction claimed was allowable under Section 36(1)(iii) of the Act. Additionally, even if the premium could not be termed as interest, it was an expenditure incurred wholly and exclusively for business purposes and thus allowable under Section 37(1) of the Act. The disallowance was deleted. 2. Disallowance under Section 40(i)(a) of the Income-Tax Act: The AO noticed that the assessee had paid Rs. 2,51,66,612 to Mitsubishi Corporation, Japan towards installation charges but had not deducted tax on Rs. 86,27,286, claimed as reimbursement of air-tickets and hotel bookings. The AO disallowed the amount, treating it as fee for technical services (FTS). The Tribunal observed that the invoices for air-tickets and hotel bills were separate and did not include any amount for installation services, indicating they were reimbursements without profit elements. The Tribunal held that the assessee was not required to withhold tax under Section 195 on such reimbursements. Moreover, the amount was capitalized and not claimed as revenue expenditure, making Section 40(a)(i) inapplicable. The disallowance was deleted. 3. Disallowance of Difference in Rent Cost: The AO disallowed Rs. 6,90,154, the difference between the rent paid by the assessee for employee accommodation and the perquisite value taxed in the hands of the employees, considering it a personal obligation of the employees. The Tribunal found the disallowance unjustified, stating that the perquisite value taxed in the hands of employees is determined by prescribed rules and does not reflect the actual cost incurred by the assessee. The expenditure incurred for employee welfare, considering commercial expediency, is allowable under Section 37(1) of the Act. The disallowance was deleted. 4. Consequential and General Grounds: Ground no. 6 was consequential, and ground no. 7 was general and dismissed. 5. Additional Ground on Payment Made Towards Education Cess and Higher Education Cess: The additional ground on the issue of deduction on payment made towards education cess and higher education cess was not pressed by the assessee during the hearing and was dismissed. Conclusion: The appeal was partly allowed, with the Tribunal deleting the disallowances related to amortization of premium on derivative on long-term borrowings, reimbursement of air-tickets and hotel bookings, and the difference in rent cost for employee accommodation. The additional ground on education cess was dismissed as not pressed. The order was pronounced on 11th January 2023.
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