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TMI Blog2017 (1) TMI 1086X X X X Extracts X X X X X X X X Extracts X X X X ..... ne by PT TVS Indonesia only and the TVSM India is not connected with the sales of the AE, PT TVS Indonesia. All the risks associated with the sales of AEs is to be borne by AE only. In such circumstances, assessee is not required to incur any expenditure towards AMP. More so, when there is no stipulation by way of any agreement between the assessee and the A.E, it is borne in mind the assessee has sold similar goods to other non-AE, assessee would not have incurred such expenditure The benefit derived from impugned expenditure is not at all for the assessee and it goes directly to the AE only. In our opinion, AMP expenditure incurred in Indonesia, the benefit accrued to only AE and assessee cannot claim any such expenditure and the AE is in different tax jurisdiction constituted distinct and independent entity subject to the law of the Indonesia and TVSM is a parent company cannot be claimed the benefit of the A.E’s business or may claim beneficial ownership treating the A.E as virtual non entities. - Decided against assessee Disallowance u/s.14A r.w.Rule 8D - Held that:- AO has to consider the assessee’s own fund i.e. capital and reserves as available on the date of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. - Decided in favour of assessee Additional depreciation - remainder of depreciation from the earlier year on which only 50% of the eligible depreciation was claimed by the assessee - Held that:- Admittedly, similar issue came up for consideration in the case of ACIT Vs. M/s.Rittal IndiaPvt Ltd. [2016 (1) TMI 81 - KARNATAKA HIGH COURT] held nothing would not restrain the assessee from claiming the balance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p service, hence no fee is required to be charged It was claimed that the corporate guarantee provided by the assessee on behalf of its AE is in the nature of shareholder activity and does not warrant a fee to be charged by the assessee Various case laws were relied upon by the assessee. 3.2 The DRP observed that the Finance Act 2012 which inserted the Explanation below section 92B with retrospective effect from 01042002 clause (c) of Explanation (i) reads as follows Capital financing, including any type of long-term or short-term borrowing, lending, or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. It was observed that any entity which provides corporate guarantee to a lender against loans taken by a borrower will charge a reasonable fee for the inherent risk in the transaction, since it is burdened with an obligation under the guarantee arrangement to pay the sum to the lender if the borrower, which in that case is the AE, defaults on the repayment of the loan. The TPO therefore, has acted within the bounds of law and reasonableness by consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material available on record. We have carefully gone through the decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi). This Tribunal found that the corporate guarantee issued for the benefit of the associated enterprise does not involve any cost to the assessee and does not have any bearing on the profit, income or loss of assets of the assessee, therefore, it was outside the ambit of international transaction to which the arm's length price adjustment can be made. The Dispute Resolution Panel has also placed its reliance on the Explanation to section 92B of the Act. The decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi) was followed by the Chennai Bench of this Tribunal in the assessee's own case for the assessment year 2009-10. 6. In view of the above, by following the order of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi) and the order of this Tribunal in the assessee's own case for the assessment year 2009-10 and for the reasons stated therein, we hold that the corporate guarantee given by the assessee to its asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the expenditure incurred for Brand promotion should not be considered as an international transaction and was also required to state why the said amount has not been reimbursed by AE and also to clarify whey the ALP has not to be calculated along with markup for the services rendered towards Brand promotion. 5.2 In response, the assessee replied that AMP expenses is not an international transaction for the reasons that there is no explicit transaction between AEs, transaction entered with third parties and higher percentage of advertisement expenditure incurred by PT TVS Indonesia. Further, the TPO observed that as per provisions of sec.92B(1), 92F(V) and Rule 10B(2)(c), arrangement between two AEs for allocation or apportionment of or any contribution to, any cost or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises is an international transaction. In this case, admittedly, the assessee has incurred the cost of AMP for the benefits of its AE accordingly AMP expenditure is an international transaction u/s.92B(1) of the Act. Further, TPO observed that apart from this, in the Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensate them for the same. In Indonesia, to gain access to this huge market, TVSM has set up its only manufacturing facility outside India in Indonesia through its subsidiary PT TVS. Therefore, to gain market share, the assessee has to make the presence of its brand felt in the Indonesian market through performing brand promotional activities on its own and through its subsidiary, PT TVS. Given this difference in this business model, the ld.A.R submitted that comparison between non-AE arrangement and brand promotion activity in the Indonesian market cannot be compared. Further, the ld.A.R submitted that TPO applied Bright Line Test (BLT) for making an adjustment to the brand promotion expenses incurred by the assessee which is not correct in accordance with the provisions of the Income Tax Act. Further, ld.A.R relied on the judgement of Delhi High Court in the case of MARUTI SUZUKI INDIA LTD. Vs. CIT in [2016] 381 ITR 117 (Del). 7. On the other hand, ld.D.R submitted that TVSM (present assessee) had not incurred any AMP expenditure in any other country where the spares and vehicles were exported by TVSM India. He submitted that TVSM India is export vehicles to other countries s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of TVS in Indonesia was exploited by AE, PT TVS Indonesia and risk associated with marketing distribution was to be borne by PT TVS Indonesia. The AMP expenditure to be borne by PT TVS Indonesia only and the TVSM India is not connected with the sales of the AE, PT TVS Indonesia. All the risks associated with the sales of AEs is to be borne by AE only. In such circumstances, assessee is not required to incur any expenditure towards AMP. More so, when there is no stipulation by way of any agreement between the assessee and the A.E, it is borne in mind the assessee has sold similar goods to other non-AE, assessee would not have incurred such expenditure The benefit derived from impugned expenditure is not at all for the assessee and it goes directly to the AE only. In our opinion, AMP expenditure incurred in Indonesia, the benefit accrued to only AE and assessee cannot claim any such expenditure and the AE is in different tax jurisdiction constituted distinct and independent entity subject to the law of the Indonesia and TVSM is a parent company cannot be claimed the benefit of the A.E s business or may claim beneficial ownership treating the A.E as virtual non entities. This view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the onus cast upon it. 9.3 In the absence of accounts maintained by the assessee in regard to its investments, the Assessing Officer cannot be expected to examine the claim of the assessee having regard to its accounts. However, since the incurrence of establishment expenses) other administrative and general expenses, etc. cannot be ruled out in regard to maintaining of investment portfolio coupled with fact of involvement of key management personnel, experts, executives, officials, etc in the decision making process and management of investment portfolio, the Assessing Officer is absolutely correct in his coming to a conclusion that certain common expenses were ipso facto incurred by the assessee while managing its investments and earning the tax free income and the AO has also recorded his satisfaction in the order 9.4 On this issue, the AO observed that no expenditure had been debited by the assessee with regard to the investments The AO has recorded his satisfaction in the order. Accordingly, Rule 8D in respect of the administrative expenses covered by sub Rule (2) clause (iii) was invoked as provided under the said Rule and disallowance was made under the said section N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below: 10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relied on by the assessee s counsel. This issue has been considered elaborately by the Commissioner of Income Tax(Appeals) and deleted the interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:- 5.2.1 Having held that provisions of rule 0D are applicable, let us now examine whether the amount has been correctly quantified. The AO had calculated the disallowance at Rs. Nil, P 1,04,38,000/- and P 26,87,000/- under (i), (ii) (iii) of rule 80 (2)respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at P 1,04,38,000/. The AO has taken into account the entire interest expenditure of P 5,79,46,000/- for computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii). 12. The decision of Calcutta Bench of this Tribunal in the case of Champion Commercial Co.Ltd. (supra) also supports the view of the Commissioner of Income Tax (Appeals). The Tribunal had considered a situation when the loans were utilized for the purchase of machineries, interest arising out of such loans, whether such interest is to be excluded for the purpose of computing disallowance under Rule 8D(2)(ii), the Tribunal held that such interest has to be excluded. While holding so, it has held as under:- 11. There is no dispute about working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt . Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be P 18,000 whereas entire common interest expenditure will only be P 10,000/-. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon ble Bombay High Court in the case of Godrej Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8 D was in challenge, is that It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon ble Bombay High Court in the case of Godrej and Boyce (supra), amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.) . Accordingly, even by revenue s own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between the borrowed funds and investment made by the assessee in the share capital and mutual funds. In the absence of any nexus, the presumption is that the assessee has invested the available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not the case of the Revenue that the sister concern or any of the Directors has misused the funds invested by the assessee. When the sister concern uses the funds only for business purpose, there was commercial expediency for making investment. Therefore, this Tribunal is of the considered opinion that there cannot be any disallowance under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962. 13. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside. The entire addition made by the Assessing Officer is deleted. We also rely in the case of Bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the TPO. Against this, the assessee is in appeal before us. 13. We have heard both the parties and perused the material on record. In this case, assessee following the mercantile system of accounting, there is no question of deferment of receipt of income since the assessee was in a position to create the document as the transaction with AE which cannot be appreciated. It is only afterthought so as to postpone the liability of taxation. Accordingly, we are of the opinion that lower authorities were justified treating the accrued royalty as income of assessee. Thus, this ground is rejected. 14. The next issue is disallowance of export agency commission paid to non-residents u/s.40(a)(i) of the Act. 14.1 The facts of the case are that the assessee has incurred a sum of ₹ 33,23,82,167/- towards export agency commission. The assessee has not deducted tax at source. The above payments were made to foreign agents for the purpose of promoting the sales of the products of the assessee. Hence, the assessee stated that the services were rendered by the agents outside India and therefore TDS u/s.195 is not applicable. Also these amounts are not taxable as per Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing the export obligation was an incident of export and, therefore, the non-resident agent was under an obligation to render such services to the assessee, for which commission was paid. The non-resident agent did not provide technical services for the purposes of running of the business of the assessee in India. Therefore, the commission paid to the nonresident agents would not fall within the definition of fees for technical services and the assessee was not liable to deduct tax at source on payment of commission. 28. Respectfully following the above judgement of the Hon ble Jurisdictional High court cited supar, the ground raised by the Revenue is dismissed. In view of the order of the Tribunal cited supra, this ground of assessee is allowed 16. Next ground is with regard to direction of the DRP erred in holding that the hedging loss is allowable only on the basis of actual realization as termination of the contracts before 31.03.2011. The ACIT/DRP ought to have appreciated that loss on foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents have no application to the facts of the case. Since the transaction is relating to acquisition of fixed assets and the profit or loss to be treated in capital field and it cannot be in Revenue in nature as held by Special Bench in the case of Oil Nature Gas Corporation Ltd. Vs. DCIT reported in 83 ITD 151(Del)(SB). Hence, this ground of the appeal is rejected. 19. The next issue is that the ACIT/DRP treated the actual loss on exchange difference in repayment of ECB loan relating to non-imported assets as capital in nature and allowed only depreciation on such loss. 20. The facts of the issue is related to actual loss on exchange difference in repayment of ECB loan. Before AO ld.A.R submitted that section 43A applied to assets importer from a foreign country out of foreign currency loan and in the instant case exchange loss/gain related to importer assets has been capitalized by the assessee itself. AO invoked the provisions of the section 43A, which was upheld by DRP. Against this assessee is in appeal before us. 21. Before us, ld.A.R relied on the order of Pune Tribunal, in the case of Cooper Corporation in ITA No.866/PN/2014. According to him, foreign fluctuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of monetary items denominated foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should be recognized in the profit loss account for the reporting period. In the same vain, CBDT notification S.O. 892(E) dated 3 1-03-2015 referred to also inter alia deals with recognition of exchange differences. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in Section 43A or Rule 115 of the Income Tax Rules, 1962 as the case may be. 10.3 The contention of the revenue that the loss is only contingent and notional and subsisting has been examined. As per section 209 of the Companies Act, 1956, the Assessee being a company is required to compulsorily follow mercantile system of accounting. S. 211 of the Companies Act, 1956 also, in terms, mandates that accounting standards as applicable is required to be followed while drawing statement of affairs. S. 145 of the Income Tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture re/rred to in section 35A; or (iv) the amount of expenditure a/a capital nature referred to in clause (ix) ofsubsection (I) of section 36: or (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50)for the pumposes of section 48, and the amount arrived at after such addition or deduction shall be takemz to be the actual cost of the asset or the amount of expenditure of a capital nature om as the case may be, the cost of inquisition of the capital asset as aforesaid: Provided that where an addition to or deduction hem the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to or, as the case may he. deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case imlay be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to acquire asset cannot alter actual cost of assets. The relevant operative para is reproduced hereunder:- Coming to the question raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee but even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be home in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government. the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and consequently to augment the profitability or reduce revenue losses of the assessee. The impugned fluctuation loss therefore has a direct nexus to the saving in interest costs without bringing any new capital asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, We are of the opinion that the plea of the assessee for claim of expenditure is attributable to revenue account has considerable merits. 10.8 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter-alia has to be computed in accordance with cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify accounting standards to be followed for determination of business income. Section 211 of the Companies Act also similarly casts a duty on a company to give a true and fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of S. 43A in the facts of that case and thus clearly distinguishable. 11. For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. The order of the CIT(A) sustaining the disallowance is not called for and is thus reversed. In the result, the Ground No.1 is allowed. In view of the decision of Co-ordinate Bench of Pune Tribunal, this ground raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is partly allowed for statistical purposes. Next, let us take up Revenue s appeal in ITA No.1183/Mds./2016 as under : 26. On perusing the appeal, we find that the AO had filed the appeal with delay of 56 days. The learned AO has submitted a Petition dated 29.04.2016 seeking condonation of delay and the AO stated in this petition that the delay of 56 days in filing the appeal before this Tribunal is on account of mixing up of papers in his office and it took time to locate the same and as soon as he traced the records, he filed the appeal on 29.04.2016. In our opinion, the reasons explained by the AO for filing the appeal belatedly is bonafide. Accordingly, the delay is condoned. 27. The only ground in its appeal is that the DRP erred in holding that the expenditure incurred towards hedging cost on ECB loan obtained for purchase of capital asset is revenue expenditure without any discussion even though the AO has treated the same as capital expenditure in the draft assessment order. 28. Since the similar issue is considered in assessee s appeal in para-22 of this order, hence, this ground does not require any adjudication and accordingly, this ground becomes infr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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