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TMI Blog2017 (1) TMI 1096X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 6169/Mum/2011, wherein the assessee has raised various grounds of appeal for challenging the following issues:- (i) Transfer Pricing Adjustment of ₹ 1,34,84,283/- on account of international transactions of sale of Polyester film products to AEs (ground no. 1). (ii) Addition of ₹ 3,52,78,000/- made u/s 28(iv) r.w.s. 41(1) on account of waiver of principal loan stated to be for acquisition of capital asset and hence capital receipt is not chargeable to tax (ground no. 2). (iii) Disallowance of interest u/s 36(1)(iii) amounting to ₹ 17,57,732/- on the ground that such interest is attributable to capital work-in-progress (ground no. 3). (iv) Amount of ₹ 2,71,000/- u/s 14A while calculating the book profit u/s 115JB (ground no. 4). 3. Before us, the ld. Counsel for the assessee, Shri Anuj Kisandwala at the outset submitted that, issues raised in ground nos. 3 4 are not pressed, accordingly, these grounds are treated as dismissed as not pressed. 4. Regarding transfer pricing adjustment, the ld. Counsel submitted that the transaction in dispute on which the T.P adjustment has been made is on account of sale of Polyester film products to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as by the Commissioner (Appeals). The assessee is engaged in the business of manufacture and sale of various types of polyester films and sun control films. For exporting its products, the assessee has two types of set-ups for export sales firstly, independent agents (for short non-A.E. Agents ) operating in Asian countries, African countries, Middle East, Far East, Russia and other CIS countries, which are mostly developing markets and secondly, through two subsidiary companies which are termed as A.E and are operating in American and European markets which are developed markets. The assessee has bench marked its international transactions with its A.Es by applying CUP method, wherein average price charged to A.Es have been compared with the average export prices charged to local customers in India. The TPO has rejected the assessee's comparison of export sales charged to A.Es with local sales price and compared the average non-A.E. export price with the price charged to two A.Es. The learned Commissioner (Appeals) accepted the contentions of the assessee that the TPO has failed to take into consideration the geographical, economical market differences where the A.E and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar market conditions where these A.Es are operating, which he failed to do so and simply accepted the trading results of the A.Es. Under the CUP method, the price of the goods or services is directly compared with the price in uncontrolled transactions under similar conditions. Internal CUP would be available if the assessee or its group entity enters into a comparable transaction with unrelated party where the goods or services under consideration are same or similar. On the other hand, there could be an external CUP if a transaction between two independent enterprises involves comparable goods or services under comparable conditions. The CUP method also requires a very high degree of comparability with regard to the quality. of products or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors. 19. Once the learned Commissioner (Appeals) found that there are so much of variables for applying either internal CUPs and has not applied external CUP, probably, due to this factor, then the entire application of CUP fails in this case. The learned Commissioner (Appeals) cannot go to examine, indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee would be at liberty to furnish all the necessary information and provide search analysis of external/internal comparables to benchmark the margin earned by the assessee on its sale transaction with the AE. Accordingly, ground No. 1 is treated as allowed for statistical purpose. 8. Coming to the issue of addition of ₹ 3,52,78,000/- as raised in ground No. 2, the relevant facts qua this issue are that, the assessee company had availed financial assistance of ₹ 125 crores from IDBI Bank during the financial year 1996-97 for setting up a continuous poly-condensation facility at Aurangabad and also for expansion of company s polyester firm manufacturing capacity by setting up new facilities. The sanction letter has been placed at pages 5 to 9 of the paper book. Later on, in order to repay the loan taken from IDBI Bank, the assessee company has taken loan from Vijaya Bank during the financial year 1998-99. During the relevant previous year of A.Y. 2007-08, with a view to reduce the burden on account of huge loan and interest liability, the assessee entered into negotiation with Vijaya Bank for one time settlement package. As a part of OTS agreement, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat such treatment in the account will not change the character or receipt. Strong reliance was placed by him on the decision of Hon ble Bombay High Court in the case of Solid Containers (supra) and held that the income of the assessee is assessable u/s 28(iv) as well as 41(1). However, so far as the interest component was concerned, the A.O. accepted that the interest amount of ₹ 2,28,33,410/- has been disallowed in the earlier years u/s 43B and, therefore, such an amount cannot be added back again. Finally, the A.O. made addition on account of waiver of principal loan amount of ₹ 3,52,78,700/-. On first appeal, the ld. CIT(A) confirmed the action of the A.O, however, he made certain observation in para No. 20, 21 26 of his appellate order which for sake of ready reference are reproduced hereunder:- 20:- It is the facts emanating from the case of' the appellant and pointed above that the VRFL loan taken by the appellant from the Vijaya Bank is for the purpose of pro rata reduction in the Rupee Term Loan liability with the IDB!, where the principal amount was to the tune of ₹ 125 crores. There could be sizeable quantum of interest specially linked to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A), it is seen that the ld. CIT(A) has decided the issue on the footing that the waiver of loan procured from Vijaya Bank pertains to the portion of loan which was procured by the assessee company towards the payment of interest amount on IDBI Term Loan. He has further distinguished the decision of Mahindra Mahindra. 10. Before us, the ld. Counsel after explaining the entire facts as discussed above submitted that, firstly, the ld. CIT(A) has misconstrued himself in coming to the conclusion that the loan taken from Vijaya Bank was towards repayment of interest amount on the IDBI Term Loan; and secondly, if ha held so then he has not even quantify how much was towards the principal loan amount and interest. Before us, he filed a chart reflecting the position of IDBI Term Loan as well as Vijaya Bank term loan, which for the sake of ready reference is reproduced below:- Period of receipt of IDBI loan May to September 1996:- ₹ 12,450 lacs Date of receipt of Vijaya Bank Loan 26.03.1998:- ₹ 1,750 lacs Repayment of Vijaya Bank loan Amount (Rs. in lacs) Amount (Rs. in lacs Amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the proposition laid down by the Hon ble Court in the case of Mahindra Mahindra as well as Solid Containers Limited (supra). Their Lordships have made a clear distinction between the loan taken for waiver of capital asset which cannot be taxed u/s 41(1) being capital on nature and waiver of amount which is on account of trading liability. 12. The ld. D.R. on the other hand strongly relied upon the order of the ld. CIT(A) and submitted that, the principle laid down by the Hon ble Apex Court in the case of CIT v. T.V. Sundaram Iyengar Sons Ltd. (supra) would be clearly applicable. Apart from that he submitted that the decision by the Hon ble Madras High Court in the case of CIT vs. Subramaniyam Homes Pvt. Ltd. in Tax Case (Appeal) No. 278 of 2014 order dated 22.4.2016 would apply, wherein the Hon ble High Court after considering the decision of Hon ble Bombay High Court in the case of Mahindra Mahindra and other decision of Hon ble Delhi High Court held that they are not in agreement with these judgments. This decision is primarily based on the decision of Hon ble Apex Court in the case of T.V. Sundaram Iyengar Sons Ltd. (supra). Thus, the decision of Hon ble Madras H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of a liability cannot be regarded as income in the hands of the assessee unless it is a trading liability and if the waiver of a loan is on capital account then certainly it cannot be reckoned as income or revenue, which is clearly evident from the relevant provisions of section 41 (1) which reads as under: (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; . From th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the assessee. In that case, there was a clear cut finding by the lower court as well as also noted by the Hon ble Apex Court that the amount was received in the course of trading transaction and, therefore, at the time of writing it back after a lapse of time, certainly amounts to benefit u/s 28. A distinction has to drawn in the cases where an amount of loan is for the acquisition of capital asset and the cases where it has been for trading purpose; the former cannot be reckoned as revenue receipt whereas later can. This aspect of the matter has been clarified by the Hon ble Bombay High Court in the case of Mahindra Mahindra vs. CIT reported in 261 ITR 501. The relevant observation, for the sake of ready reference, is reproduced below:- The income which can be taxed under Section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, Section 28(iv) does not apply to benefits in cash or money. Secondly, in this case we are concerned with the purchase consideration relating to capital asset. The toolings were in the nature of dies. The assessee was a manufacturer of heavy vehicles and jeeps. It required these dies f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is partly allowed. Now, we shall take up the Revenue s appeal in ITA No. 6541/Mum/2011 for A.Y. 2007-08. 18. In this appeal the revenue has raised the following grounds:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in restricting 'the Transfer Pricing adjustment made by the TPO/AO to the extent of ₹ 1,34,84,283/- and allowing a relief of ₹ 1,41,61,488/without considering the fact that the amendment to Proviso to section 92C(2) of the Act shall apply in relation to all cases in which proceedings are pending before the TPO on or after 01-10-2009, and hence was applicable in the case of the assessee as the proceedings for A. Y. 2007-08 were pending as on 01-10-2009. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored. 19. It has been admitted by both the parties that the observations and findings of the ld. CIT(A) that proviso to section 92C(2) does not provides for standard deduction of (+/-) 5% range. Such a proposition is untenable in law, because the statute does not provide for any type of standard deduction, therefore, such observat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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