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TMI Blog2015 (3) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... and on facts in disallowing additional depreciation u/s 32(1)(iia) on some of the items of fixed assets (plant and machinery) amounting to Rs. 2,778,806/-. 4. The learned AO and learned DRP erred in law and on facts in treating "Discount on pre-payment of Sales Tax Deferral liability" of Rs. 37,362,364/- as remission / cessation of liability, chargeable to tax u/s 41(1) of the ITA, 1961. 5. The learned AO and learned DRP erred in law and on facts in recalculating the BOOK PROFIT of the assessee u/s 115JB by adding following items of (a) Disallowance of Sec 14A Rs.23,40,102/- (b) Provision for bad & doubtful debts Rs.1,66,83,405/- (c) Provision for Warranty Rs.82,80,000/- (d) Provision for Diminution of Assets Rs.18,41,037/- 6. The appellant craves leaves to add, modify, alter, amend or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 3. The brief facts of the case are that, the assessee company was engaged in the business of manufacture of polymer engineering and electrical goods and wind power generation. During the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions Amount of Transactions Method Adopted 1. Disbursement of loan 7,66,740 CUP 2. Repayment of loan 2,79,10,000 CUP 3. Interest receivable 2,91,82,060 CUP 4. Part conversion of capital into loan 57,24,00,000 CUP Total 63,02,58,800 5. The TPO issued a show cause notice to the assessee as no TP Study report had been submitted by the assessee. Further, transaction had taken place with the AE, under which, part of the capital had been converted into loan and the source of such capital was a loan obtained from Citi Bank. Further, the Indian banks were lending the money at the BPLR rates prevailing in India. However, the interest charged by assessee to AE on such loan was 4.75%. The assessee was show caused as to why interest amount could not be charged to AE at the Indian BPLR rates and accordingly, the TP adjustment be worked out. Since the assessee failed to furnish any reply to the said show cause notice, the TPO proceeded to work out the addition on the basis of the material available on record. The TPO noted that during the year under consideration, interest of Rs. 2.91 crores had accrued to the assessee on loan granted to the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is the totalities of these aspects and factors which are determinative of the lending rate by the banks and the BPLR thus serves as guidance for the lending rate. The objectivity and applicability of BPLR can be taken as topnotch coupled with the factors associated with the borrower and the surrounding economic circumstances." 7. The TPO was of the view that BPLR or the lending rates would be the correct indicator factor for the determination of the charge of interest on advance to the subsidiary because the assessee was not a banker. The TPO further observed that it was a fact of the case that the loan has been advanced by the assessee to its AE and for having advanced such loan, interest has been provided in the books of account. It is this interest rate, which has been agreed to be charged by the assessee, was to be benchmarked to determine its Arm's Length Price. As per TPO, the loan has been given to company which has no financial legs to run on and further, on its own it could not have arranged for the funds it required that the loan has been given by the principal to its subsidiary. In the given financial health of the subsidiary and for assuming the risk pertainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the Arm's Length Price adjustment of the international transactions. 9. The assessee is in appeal against the said adjustment made by the TPO and raised the issue vide grounds of appeal Nos.1 and 2. The learned Authorized Representative for the assessee pointed out that investment was made by the assessee to its wholly owned company Netherland to buy stake in Italian company. The investment made by the assessee company was twofold; i.e. in the shares of the Netherland's company and also the loan advanced to the said company for the first two years, loan continued at interest rate of 4.75%. As per the TPO, the assessee should have applied BPLR rate. However, since the assessee was making international lending, charged the international rates and not domestic rates. The borrowings for the said investments were made from Citi Bank which in turn, charged interest. The assessee claims that substantive part of the deal was in capital investment in wholly owned company, in turn acquisition of company in Italy. The loan received from Citi Bank was utilized for two purposes i.e. acquisition of share capital and also for international funding. The learned Authorized Representative for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan 2,79,10,000 CUP 3. Interest receivable 2,91,82,060 CUP 4. Part conversion of capital into loan 57,24,00,000 CUP Total 63,02,58,800 12. The assessee had partly converted its capital invested in the associated enterprises into loan transactions and the source of the said capital was loan obtained from Citi bank. The TPO noted that the assessee had diverted part of the loan raised from Citi bank to its associated enterprises, for raising the loan charge had been created against the assets of the assessee company. As per TPO, the Indian banks were lending the money at BPLR rates prevailing in India on the security of the assets of the company, whereas the assessee had charged interest rate of 4.75% to its associated enterprises on such loan disbursement. 13. During the year under consideration, interest of Rs. 2,91,82,060/- had accrued as interest on loan granted to its associated enterprises. The assessee had granted loan to M/s. Varroc European Holding BV Netherlands Euro 1,00,00,000 and repayment of loan of Euro 5,00,000, hence during the year, the effective loan amounted to Euro 96,30,000 which was equivalent to Rs. 55,21,57,400/-. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced to the subsidiaries, amounting to Rs. 4,41,74,661/- was added to the value of international transactions to arrive at the arm's length price of the international transactions. The TPO dis-regarded the LIBOR+ rate of 6.75% as not the benchmark applied by the assessee as according to that rate, the interest should have been charged at Rs. 4,03,52,970/- whereas it had only charged Rs. 2,86,27,089/-. In view thereof, an adjustment of Rs. 4,41,74,661/- was made in the hands of the assessee. The said order of TPO has been upheld by DRP. 15. In the facts of the present case, the assessee had advanced money in the form of share application money which were later converted into loan on the advice of European Consultants. On such advance made to its associated enterprises, the assessee had charged interest @ 4.75%. While benchmarking the international transactions what has to be seen is the comparison between related transactions i.e. where the assessee has advanced money to its associated enterprises and charged interest then the said transaction is to be compared with a transaction as to what rate the assessee would have charged, if it had extended the loan to the third party in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the associated enterprises was in foreign currency and the transaction was an international transactions, then the transaction would have to be looked upon the applying the commercial principles in regard to international transactions. If that was so, then the domestic prime lending the rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, the view that LIBOR rate had to be considered while determining the arm's length price interest rate in respect of the transaction between the assessee and the associated enterprises was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this account was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted." 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation. The Assessing Officer found that the nature of the assets did not fall under the block Plant & Machinery, but pertained to the block of Furniture & Fixtures, on which the depreciation was allowable on lower rates compared to the rates on which the depreciation was allowable on Plant & Machinery. Further, additional depreciation was not allowable on the said Furniture & Fixture items. The assessee was show caused to explain its claim and in response, the assessee contended that they were part of the Plant & Machinery. The Assessing Officer at pages 4 and 5 of the assessment order considered each of the items and held that since the items were not covered under Plant & Machinery, no additional depreciation was allowable on the same. The DRP upheld the order of Assessing Officer, against which the assessee is in appeal. 22. The learned Authorized Representative for the assessee pointed out that items enlisted at page 3 of the assessment order were used for the manufacturing of activities carried on by the assessee and functional test had to be applied in order to determine the nature of the assets. The learned Authorized Representative for the assessee placed reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10777 Total 1667283 2223050 1111522 555756 2223050 26. The first item was the Racks which are utilized for keeping any type of material or goods and cannot form part of the Plant & Machinery. We are of the view that the Racks cannot be considered as part of block of Plant & Machinery and no additional depreciation is allowable on the same. Further, depreciation @ 10% is to be allowed on such Racks being Furniture & Fixtures. 27. The next item is Trolley which as per the Assessing Officer is part of the Furniture & Fixtures as the same is used for transferring material and goods from one place to another. The value of the Trolley is Rs. 16.01 lakhs and Rs. 20.78 lakhs. Keeping in mind the nature of asset and functional test, we find no merit in the order of Assessing Officer in this regard and direct the Assessing Officer to consider the same within block of Plant & Machinery and allow the depreciation and additional depreciation on the same. 28. The next items were Air-conditioner, TV Music System and Industrial Fan. The Air-conditioner is Plant & Machinery on which the depreciation at higher rate is allowable. However, no additional depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent value of future liability, in our opinion, classified as remission or cessation of liability so as to attract the provisions of section 41(1) of the Act. The Assessing Officer disallowed the claim of the assessee, which was upheld by the DRP. 33. The learned Authorized Representative for the assessee pointed out that the issue was squarely covered by the ratio laid down in Sulzer India Ltd. Vs. JCIT (2010) 42 SOT 457 (Mumbai). 34. The learned Departmental Representative for the Revenue had placed reliance on the order of Assessing Officer. 35. We have heard the rival contentions and perused the record. The issue arising in the present appeal is with regard to the Sales Tax Deffered Scheme under which, the assessee had made advance payment of sales tax. As per the Scheme, where the payments were made in advance, then the assessee was to deposit a lesser amount as compared to the amount of sales tax collected, resulting in credit of Rs. 3.73 crores. The same was not recognized as income by the assessee. However, the Assessing Officer was of the view that the surplus on premature payment of Sales Tax Deffered Loan, was taxable under section 41(1) of the Act. 36. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te is valid, at its option, prematurely pay in place of the amount of tax deferred by it an amount equal to the net present value of the deferred tax as may be prescribed and on making such payments, in the public interest, the deferred tax shall be deemed to have been paid. In the instant case the assessee had opted for the offer of SICOM, an implementing agency of the State Government and repaid an amount of Rs. 337.13 lakhs to SICOM which according to the assessee represented the NPV of the future sum as determined and prescribed by SICOM. The said payment was made to SICOM on 30-12-2002 as per certificates dated 25-8-2003. It has already been demonstrated that NPV is equivalent to future value of the sum. In other words, what the assessee was required to repay after 12 years in six annual/equal instalments, the same was repaid by the assessee, in the public interest, as NPV is equivalent to the Future Value of the sum. Further, there was no iota of evidence to show that there had been any remission or cessation of liability by the State Government. Thus, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the facts of the instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer while computing the book profits had added back disallowance worked out under section 14A of the Act to the net profits of the business. The plea of the assessee in this regard was that the assessee itself had disallowed sum of Rs. 42,37,722/- on account of disallowance under section 14A of the Act under regular provisions and Rs. 32,86,397/- under section 115JB provision in its return of income on proportionate basis. The Assessing Officer recomputed the book profits under section 115JB of the Act and the CIT (Appeals) deleted the same against which the Revenue is in appeal. 6. We find that similar issue of computation of book profits under section 115JB of the Act in view of readjustment on account of disallowance under section 14A of the Act arose before the Tribunal in assessee's own case relating to assessment year 2008-09. The Tribunal in ITA No.1120/Chd/2011 vide order dated 27.7.2012 in turn relying on an earlier decision of the Chandigarh Bench of the Tribunal in DCIT Vs. Ind Swift Ltd. in ITA No.729/Chd/2009 relating to assessment year 2006-07 - date of order 30.11.2009 held as under: 5. We have heard the rival contentions and perused the record. The only iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd issue being identical we find no merit in the aforesaid addition made by the Assessing Officer and upholding the order of the CIT (Appeals) we dismiss the grounds of appeal raised by the Revenue. 7. The issue before us is identical to the issue before the Tribunal in the case of sister concern and following the same parity of reasoning we direct the Assessing Officer to exclude the disallowance made under section 14A of the Act, while computing the book profits u/s 115JB of the Act. We direct the Assessing Officer to recompute the book profits under section 115JB of the Act. The ground of appeal raised by the assessee is allowed." 42. The issue before us is identical to the issue before the Chandigarh Bench of the Tribunal in Nahar Industrial Enterprises Ltd., Vs. DCIT (supra) and following the same parity of reasoning we direct the Assessing Officer to exclude the disallowance made under section 14A of the Act, while computing the book profits u/s 115JB of the Act. Accordingly, we direct the Assessing Officer to re-compute the book profits under section 115JB of the Act. The ground of appeal No.5 is thus, allowed. 43. In the result, the appeal of the assessee is partly allow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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