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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 ..... apital asset and hence capital receipt is not chargeable to tax (ground no. 2). (iii) Disallowance of interest u/s 36(1)(iii) amounting to Rs. 17,57,732/- on the ground that such interest is attributable to capital work-in-progress (ground no. 3). (iv) Amount of Rs. 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 Associated Enterprises (AE); 'Global Pet Films Inc.' and 'Garware Polyester International Ltd.', a US and UK based company respectively. The assessee has benchmarked the said transaction by applying CUP method wherein average price charged by the AE were compared with the average price of these products charged to local customers of the assessee. The TPO noted that the assessee has been selling the films to non-AEs located in dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndly, 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 non-A.E. agents are carrying out their business activities. He also appreciated that the export price of the proceeds varies considerably from country to country and specifically in a developed market of U.S. and U.K. in comparison to Asian and African countries. He analysed the prices and also the nature of market which has been advertum discussed in detail in the foregoing paragraphs. However, after having come to the conclusion that the TPO&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration 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, independently the operating expenditure and operating profits of the A.Es for determining the ALP. A comparability analysis has to be carried out for determining the ALP. Provisions of section 92C provides computation of ALP and envisages that the ALP in relation to an international transaction shall be determined by any of the methods prescribed therein, being the most appropriate method having regard to the nature of transactions or class of transactions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al assistance of Rs. 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 company was made to pay lump-sum amount of Rs. 7 crores against the total amount due of Rs. 12,81,12,110/- as on 31st March, 2006. The total waiver of Rs. 5,81,12,110 was bifurcated into; principal amount of loan of Rs. 3,52,78,000/-; and on account of interest payable at Rs. 2,28,33,410/-. The waiver of principal amount of Rs. 3,52,78,000/- was transferred to 'capital reserve'. The assessee treated the said amount as capital receipt as the loan was on capital ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d back again. Finally, the A.O. made addition on account of waiver of principal loan amount of Rs. 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 Rs. 125 crores. There could be sizeable quantum of interest specially linked to the rate of interest at 19% at the time of issue of letter to the appellant. Further the assets created by such loans from the IDBI must have been charged to P&L a/c by way of' their depreciation and also interest on the amount of loan .after the commencement of production. It is towards such charge of interest and depreciation that the VFRL taken from the Vijaya Bank can only be considered to be have been utilized. Accordingly, the loan so taken from Vijaya Bank is clearly towards the expenditure by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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:- Rs. 12,450 lacs Date of receipt of Vijaya Bank Loan - 26.03.1998:- Rs. 1,750 lacs Repayment of Vijaya Bank loan Amount (Rs. in lacs) Amount (Rs. in lacs Amount of loan taken from Vijaya Bank 1,750.00 Payment of interest on IDBI accrued till 31.12.1997 (549.95) Interest accrued for 3 months @ 19% (16% + 3%) from 31.12.1997 to 31.03.1998 on 9950 lakhs. (472.63) 1,022.58 Balance amount of Vijaya Bank Term Loan utilized to pay off IDBI Term Loan Principal 727.43 Thereafter, the ld. Counsel drew our attention to the entries in the balance sheet and pointed out that the interest amount as on 31st December, 1997 on IDBI Term Loan was Rs. 5.5 crores. From this he pointed out that, out of the amount taken from Vijaya Bank of Rs. 17.50 crores, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 High Court should be followed. 13. In the rejoinder, the ld. Counsel submitted that the decision of Hon'ble Madras High Court had come up for consideration before this Tribunal in the case of ITO v. Santogen Silk Mills Ltd. in ITA No. 1700/Mum/2013 for A.Y. 2009-10, dated 22.6.2016, wherein it has been held that the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra (supra) will apply in the jurisdiction Bombay High Court. 14. We have carefully considered the rival submissions and also perused the relevant material placed on record including the judicial decisions cited by both the parties. It is an undisputed fact that the assessee have availed term loan from IDBI Bank for a sum of Rs. 125 crores for acquisition of capital assets and setting up of manufacturing plant. Such nature of loan was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cruing 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 the plain reading of above section it is quite ostensible that before this section can be invoked it is sine-qua-non that assessee should establish that first of all an allowance or deduction has been granted during the course of assessment for any year in respect of, (i) loss; (ii) expenditure; or (iii) trading liability, which is incurred by the assessee; and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, whatsoever; (i) any amount in respect of such loss or expenditure, or (ii) some benefit in respect of such trading liability by way of remission or cessation of such liability. Thus, a remission or cessation of liability which can be deemed to be as an income must be a trading liability for which an allowance or deduction has been made in the assessment for an earlier year. Assessee's liability on account of the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, Section 28(iv) is not attracted. In our case, the most fundamental fact which is required to be borne in mind is that there was no deduction given to the assessee in earlier years and, therefore, Rs. 57,74,064 could not be included as income under Section 41(1) of the Act. Lastly, it is important to bear in mind that the tooling constituted capital asset and not stock-in-trade. Therefore, taking into account all the above facts, Section 41 (1) of the Act is not applicable". Moreover, the Hon'ble Bombay High Court in the subsequent decision in the case of CIT vs. Softworks Computers Pvt. Ltd. reported in 354 ITR 16 have considered both the decisions of Mahindra & Mahindra (supra) and Solid Containers Ltd. Reported in 308 ITR 417 and gave th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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