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TMI Blog2016 (3) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... treat the foreign exchange fluctuation as an operational cost revenue/cost vide para 8.3, we are unable to understand how the AO can take a decision now treating it as a speculative loss, contrary to the direction of the DRP Un-realized foreign exchange gain on FCCBs - whether treated as ‘income’ or not? - Held that:- We direct the AO to treat the above amount as on capital account, to be adjusted in capital accounts. However, if any benefit was obtained by assessee in the TP provisions by treating this amount as operational income, we direct the AO/TPO to examine the working again, so as to exclude the amount from the computation and if any adjustment is required. Assessee cannot take advantage of its own stand to the detriment of Revenue in TP provisions. There should be a constant approach. Treatment of this gain as operational income does not arise as the same was not treated as income, therefore any computation based on that has to be reexamined. This issue can be considered by the TPO afresh and if necessary, necessary proceedings can be initiated under the TP provisions as a direction by the Bench. With these directions, these grounds are allowed. Realised foreign exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l charges - invoking the provisions of Section 40(a)(ia) - Held that:- The order of the DRP cannot be accepted. First of all, DRP should have seen whether the amounts are credited to individual accounts or general provision was made. Not only that explanation © to the section 194J specifies that credit in the Books of Account also attracts TDS. Since the direction of the DRP is not in accordance with the provisions of the Act, we have no hesitation in reversing the said decision. The AO’s action is upheld. However, AO is directed to examine whether the amounts so disallowed are pertaining to the unit in which assessee has claimed 10AA deduction and if so, the disallowance would increase the profits of such unit. Accordingly, deduction u/s. 10AA may have to be increased. This aspect requires examination by the AO. Subject to that, Revenue’s ground is treated as allowed. Disallowance of depreciation on servers - Held that:- No reason to interfere with the order of the DRP. The servers are the part of computer equipment and cannot work in isolation. Accordingly, the directions are upheld. Revenue’s ground on this issue is rejected. Adjustments made to export turnover for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue on non-granting of foreign tax credit is also involved. Aggrieved on the DRP s orders, assessee is in appeal and raised as many as 32 grounds. Likewise, Revenue is also aggrieved on the DRP s directions allowing some of the contentions of assessee and accordingly, Revenue has raised four material grounds in its appeal. 3. We have heard the Ld. Counsel for assessee and the Ld. DR and perused the Paper Books placed on record. Assessee s Appeal in IT(TP)A No. 373/Bang/2015: 4. Ground Nos. 1 to 8 are general in nature and does not require any adjudication. 5. TP issue : Ground Nos. 9 to 11 pertains to determination of arm s length interest rate by the TPO. During the FY. 2009-10, assessee received interest on loans given to its AE amounting to ₹ 2.18 Crores. It was submitted that interest so received was at Arm s Length Price (ALP), however, TPO adopted the rate of 14.74% in respect of loans advanced by assessee to its AE. Assessee contended before the DRP that the determination of bench mark rate of interest is without any basis. The DRP did not follow the order passed in earlier year wherein the DRP directed that interest rates of that country should be adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Bombay High Court in the case of Tata Autocomp Systems Ltd., 56 taxman.com 206 (Bom) has upheld the interest rate being charged in the country where the loan is received/consumed. Accordingly, it was submitted that USD LIBOR rate is an average of 2.854%. Accordingly, assessee s interest received being at 6% should be considered at arm s length. 13.4 We have considered the contentions and perused the orders of authorities. As noted above, the AO did not implement the DRP direction, therefore to that extent, assessee s grievance is valid. It was submitted that if the DRP directions are implemented, the effective interest rate on the Loan Connector database would come to 3.53% and on the basis of decision of the Hon ble Bombay High Court, if average rate prevailing in USD is considered, that would come to 2.85%. Since the above interest rates are less than the rate of interest received by the assessee at 6%, there is no need to make any adjustment in the given facts of the case. However, since the AO did not undertake the exercise of giving effect to DRP order, we are of the opinion that the details furnished by the assessee with reference to the above average rates based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,807,500,000 3. Capital Employed 7,924,787,280 4. 5% of capital employed 396,239,365 5. 1/5th of 5% of capital employed (claim allowable consequent to Tribunal s order) 79,247,872* * As against the claim of INR 1,172,873 computed by the ld. AO. We direct the AO to examine the above and allow relief as in earlier years, since claim is arising in earlier years. With this, this ground is considered as allowed. Respectfully following the same, we direct the AO to examine and allow as in earlier years and these grounds are considered as allowed. 9. Ground Nos. 14 to 19 pertains to adjustment made by the AO under the head Foreign Exchange Loss as in earlier years. AO referred to the Board Circular and treated the mark to market gains/losses and some of the option contracts, forward contracts etc., as speculative loss. While doing so, he also did not allow the foreign exchange gain on restatement of FCCB as well as exchange gain adjusted with cost of assets while computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt accounting year, following the Accounting Standards AS-11, mark-to-market (MTM) losses or gains are determined and accounted for under the head foreign exchange gains/losses . 16.1 It was submitted that during the financial year relevant to AY 2009-10, assessee has entered into hedging contracts with various banks. Some of these above contracts did not mature till 31.3.2009. Accordingly, the MTM losses to an extent of ₹ 9,72,32,040 was booked in the books of account on the basis of exchange rates prevailing on 31.3.2009 in accordance with AS-11. 16.2 The AO treated the losses as speculative in nature and contingent in nature and disallowed the same. The DRP also accepted the opinion of the AO. 16.3 It was submitted that assessee has consistently followed the same method of accounting with regard to MTM gains/losses on option contracts. For the years where there is MTM gain, assessee had dully offered the gain to tax and in years where there has been MTM losses, assessee claimed the same as deduction. The details submitted by the assessee are as under:- Sl. No. A.Y. MTM Gain/(Loss) on option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed recoverables over a period of time, assessee hedged foreign exchange risk by entering into above contracts. It was submitted that judicial precedents as laid down by the Hon ble Supreme Court in the case of CIT v. Woodward Governor (P) Ltd. (supra) and ONGC v. DCIT, 322 ITR 180 in fact support the assessee s contentions that these transactions are not contingent in nature. It was further submitted that these are also not speculative in nature. 16.6 The ld. DR, however, relied on the order of AO and read out the Instruction as issued by the Board and analysed that transactions entered into by the assessee are both speculative in nature and the losses booked are contingent in nature. 16.7 We have considered the rival contentions. As stated by the Auditors, assessee has entered into option contracts/forward contracts for the purpose of hedging the risk associated with foreign exchange exposure only to the extent of receipts in the earlier years, which is less by ₹ 60 crores of total foreign currency received during the year. This indicates that assessee has entered into contracts on the anticipated receivables in order to protect the variations in fluctuation mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in as part of operating cost vide para 4 5 with reference to foreign exchange fluctuation gain on restatement of FCCBs. When the DRP directed the AO to treat the foreign exchange fluctuation as an operational cost revenue/cost vide para 8.3, we are unable to understand how the AO can take a decision now treating it as a speculative loss, contrary to the direction of the DRP. In view of this, Ground Nos. 14 15 is allowed. 10.1. Coming to the issue in Ground Nos. 16 17, the facts are that assessee has issued FCCBs amounting to ₹ 780.75 Crores for the purpose of acquisition of Subex America INC, a overseas subsidiary. The investment in Subex America s INC amounting toRs. 774.95 Crores appears in schedule G to the financial statements. Assessee has recognized unrealised foreign exchange fluctuation gain amounting to ₹ 91.88 Crores on restatement of FCCBs and credited the same to its P L A/c. However, restatement gain being related to investment in Subex America was not offered to tax in the return of income. AO has not allowed the exclusion from the computation of income. The DRP it seems allowed the said income to be operational income while considering the TP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of acquiring fixed assets. In other words, in the second category of cases, we are concerned with the assessee(s) incurring liabilities on capital account. In such cases, we are required to consider the provisions of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002). Thereafter in para 22 of its judgment it dealt with cases where the fluctuation is on account of capital items as follows:- Facts in M/s Honda Siel Power Products Ltd. (Civil Appeal arising out of SLP(C) No. 7632/08) Capital account case : 22. The main issue which arises for determination in this batch of civil appeals is : whether the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date pending actual payment of the varied liability. In this batch of civil appeals, we are concerned with increase in the existing liability on account of foreign exchange fluctuations on capital account . 40. After considering the provisions of Sec.43A of the Act, the Hon ble Supreme Court held that Sec. 43A(1) applies where as a result of change in rate of exchange there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view the facts of the case in the decision of the Madras High Court in the case of PVP Ventures Ltd. (supra), is identical to the facts of the case of the Assessee in this appeal. FCCBs are instruments issued to investors for raising funds which is repayable after certain period. It is a debt instrument. The increase or decrease in liability on account of fluctuation in foreign exchange as on the date of the Balance sheet would increase or decrease the liability of the Assessee and such liability would be on capital account. Therefore the gain or loss would be on capital account and not taxable. We accordingly hold in favour of the Assessee on this issue . Respectfully following the same, we direct the AO to treat the above amount as on capital accout, to be adjusted in capital accounts. However, if any benefit was obtained by assessee in the TP provisions by treating this amount as operational income, we direct the AO/TPO to examine the working again, so as to exclude the amount from the computation and if any adjustment is required. Assessee cannot take advantage of its own stand to the detriment of Revenue in TP provisions. There should be a constant approach. Treatment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w: a. ITO (International Taxation), Ward 1(2), Bangalore V. M/s. Kawasaki Micro Electronics Inc. [Cross objection No. 18/Bang/2015 in I.T. (IT) A. No. 1221/Bang/2014 (Bangalore Tribunal)]; b. SMS Demag (P) Ltd. V. DCIT [(2010) 132 TTJ 498 (Delhi Tribunal)]; c. CIT V. Mark Auto Industries Limited [ITA No. 57 of 2009 unreported (Punjab and Haryana High Court]; and d. SKOL Breweries Ltd. V. ACIT [(2013) 29 taxmann.com 111 (Mumbai Tribunal)], etc. 13.1. Another contention raised is that the AO wrongly calculated the depreciation @ 60% considering the assets to be used for more than 180 days. It was submitted that an amount of ₹ 1,23,240/- was pertaining to purchases of less than 180 days on which, thee was excess disallowance of ₹ 36,972/-. 14. We have considered the rival contentions and examined the provisions of Section 40(a)(ia). As per the provisions of Section 40(a)(ia), what the AO can disallow invoking the said provision is only with reference to interest, commission/brokerage, rent, royalty, fees for professional services or fees for technical services or amounts payable to a contractor or sub-contractor. It is not known how the AO can treat the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware outside India and hence no adjustment was warranted to the export turnover ; c. No expenditure was incurred in foreign currency for rendering any technical services outside India and hence no reduction of foreign currency expenditure was warranted from the export turnover ; and d. The export invoices of the Appellant do not include any expense towards communication costs, insurance or expenses incurred in foreign currency and hence, the said expenses ought not to be reduced from the export turnover . 15.2. It was brought to the notice of the AO that, the aforesaid expenses relate to both the SEZ units and not SEZ Unit 2 alone and also for reasons stated above, none of the aforesaid expenses were required to be reduced from the export turnover . AO, however, proceeded to reduce all the aforesaid expenses from the export turnover of SEZ Unit 2 for the purpose of computing deduction under section 10AA of the Act. 16. We have considered this issue also in the appeal for AY. 2009-10 in IT(TP)A No. 223/Bang/2014 and decided as under: 18.4 We have considered the rival contentions and perused the arguments placed on record. As far as definition of export turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to the delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. Thus from the definition it is clear that telecommunication charges and insurance are not to be directly incurred for the purpose of delivery of articles or things or computer software outside India but it is sufficient if the same is attributable to the said purpose. The assessee s business being development and export of computer software, all the expenditure incurred by it is attributable to the delivery of articles or things or computer software outside India. If the Legislature has intended that the said charges should be directly incurred for the purpose of delivery of articles or things or computer software outside India, then the Legislature would not have used the word attributable but would have used the word incurred for the delivery of articles or things as has been done in the second part of the said definition with regard to the expenditure incurred in foreign exchange in providing technical services outside India. In view of the same, we are of the opinion that the telecommunication charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO cannot be excluded as per definition of export turnover provided in Explanation 1 to section 10AA of the Act. 18.8 Even though the DRP has considered the alternate contention that this expenditure has to be reduced from total turnover and in the consequential order passed AO these were excluded from export turnover and total turnover, the assessee had in fact became eligible for 100% deduction u/s. 10AA profit as quantified by the AO. We find that the above discussion is purely of academic nature, as practically there is no grievance of the assessee, since deduction was allowed at 100% on the alternative ground accepted by the DRP. Since the assessee has contested the issue in the grounds and since we find that these expenditures are not related to the expenditure of the nature as specified in Explanation 1, we adjudicated this contention on merits. The grounds are considered as allowed . Respectfully following the above, we direct the TPO to exclude the amounts which are considered for disallowance, other than those expenses pertaining to freight, telecommunication charges or insurance attributable to the delivery of articles or things outside India or directly relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books on account of non-deduction of tax at source. In this regard it is stated that when an income is credited to any account in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee, but the fact that the credit to any account is to be deemed to be credit to the account also presupposes that identity of the payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. Therefore, TDS provisions cannot be invoked in a case where the person who is to receive the professional charges cannot be identified at the stage at which the provisions for professional charges accrued but not due is made. Accordingly, no tax was required to be deducted at source in respect of the provision for professional charges payable made by the assessee which reflected provision for professional charges accrued but not due in a situation where the ultimate recipient of such professional charges accrued but not due could not have been as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch devices are integral part of computers. Moreover the servers are part of computer equipment and cannot work in isolation and accordingly fall under the purview of the term Computer Software and are eligible for depreciation at the rate of 60%; Therefore depreciation on servers will be allowed at the rate applicable to computers i.e. 60% . 19.1. After considering the rival contentions, we do not see any reason to interfere with the order of the DRP. The servers are the part of computer equipment and cannot work in isolation. Accordingly, the directions are upheld. Revenue s ground on this issue is rejected. 20. Next issue for consideration in Ground Nos. 4 5 is with reference to adjustments made to export turnover for the purpose of deduction of Section 10AA. AO has disallowed certain expenditure pertaining to delivery of goods outside India and re-worked out the export turnover while calculating deduction u/s. 10AA. However, he has not reduced the same from the total turnover. DRP while upholding the exclusion of certain expenditure (which was considered in assessee s appeal above), directed the AO to treat the same for the purpose of total turnover also and to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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