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TMI Blog2017 (8) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... We consider the facts of the case as narrated in the assessment year 2008-09 for brevity that the assessee claimed unrealised exchange loss on account of derivative transaction to the tune of Rs. 3,76,68,000. According to Assessing Officer, the assessee's claim of losses on account of valuing the foreign exchange liabilities/receivables at the rates prevailing as on March 31, 2010 are not on account of foreign exchange receivable/payable resulting from the regular business transactions. The liabilities are on account of the hedging/forwarding contracts, which are totally independent from the assessee's regular business of exporting the manufactured goods. The assessee during the year, in order to reduce its risk of exposing to the fluctuations in the exchange rates, entered into hedging contracts, which are essentially forward contracts, have been valued at the exchange rates prevailing at the end of March 31, 2010 and the resulting deficit has been treated by the assessee as exchange loss and debited in the profit and loss account. The assessee further claimed that since it had entered into the hedging/forwarding contracts to protect the possible losses of the business on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal in the case of Majestic Exports v. Joint CIT (I.T.A. Nos. 1336 and 3072/Mds/2014 for the assessment years 2009-2010 and 2010-2011 vide order dated July 24, 2015) the Tribunal held as follows : "We have heard both the parties and perused the material on record. In this case, the assessee was engaged in the business of manufacturing and export of hosiery garments. During the course of export, the assessee entered into derivative contract. The assessee incurred loss in this transaction. The assessee claimed it as business loss. According to the Assessing Officer this loss was not business loss and it is a speculative loss and this transaction is speculative in nature as such the loss incurred on this transaction cannot be set off against business income of the assessee. According to the learned authorised representative for the assessee, the derivative transaction cannot fall under section 73. The Explanation to section 73 creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such loss should be treated to be speculative transaction within the meaning of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or derivative transaction. 8.1 Now, this view has been taken by a co-ordinate Bench, Chennai in the case Aishwarya and Co. P. Ltd. (I. T. A. No. 860/Mds/2014, dated May 29, 2015), wherein they followed the judgment of the Calcutta High Court in the case of CIT v. Baljit Securities P. Ltd. [2014] 368 ITR 470 (Cal) ; 88 CCH 313 wherein held as under (page 471 of 368 ITR) : 'Clause (d) of section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a speculative transaction. Sub-section (1) of section 73 provides as follows : "(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business." The resultant effect was that any loss arising out of speculative transaction could only have been set off against profits arising out of speculative transaction. In the present case, the assessee, as alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done.' 9. From the above decision of the Calcutta High Court in the case of Baljit Securities P. Ltd. cited supra, the issue stands covered in favour of the assessee. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transaction is in excess of export turnover, then that loss suffered in respect of that portion of excess transactions to be considered as speculative loss only as that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. This ground is allowed as indicated above." Further, a similar view was taken by the co-ordinate Bench in the case of Ambattur Clothing Ltd. v. Joint CIT [2016] 6 ITR (Trib)-OL 358 (Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, the payment amounts to royalty for using the leased lines and the assessee should have withheld the tax on the said payment and the decision of the Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. v. ITO (International Taxation) [2014] 361 ITR 575 (Mad) ; (TS-577-HC-2013) is applicable in this case. 6.1 Further, it was observed that based on the Explanation to section 9(2) of the Act inserted by the Finance Act, 2010 with retrospective effect from June 1, 1976 and the amendment to section 195(1) made in the Finance Act, 2012, with retrospective effect from April 1, 1962 and the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 (SC), the expenditure towards leased telephone lines was disallowed in the draft order. Accordingly, the Dispute Resolution Panel upheld the proposed disallowance of leased telephone line charges for the assessment year 2010-11 with an observation that the payment is not a reimbursement but is a clear case of sub-leasing of telephone lines by TRW Automotive Services. Further, it was observed that the payments were made by the assessee for the services received in the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorised representative was not able to demonstrate that it does not include any profit element. Accordingly, we remit this issue to the file of the Assessing Officer and the assessee is directed to show that this is only reimbursement on cost to cost and it does not include any element of profit. This ground is allowed for statistical purposes for both the assessment years. 11. The next ground raised by the assessee in I. T. A. No. 444/15 and I. T. A. No. 560/16 for the assessment years 2010-11 and 2011-12 is with regard to the disallowance of additional depreciation under section 32(1)(iia) of the Act. 11.1. The facts as narrated in the assessment year 2010-11 are that the assessee in its return of income claimed additional depreciation of Rs. 2,19,57,207, being 10 per cent. (50 per cent. of 20 per cent.) on the plant and machinery purchased in the second half of the financial year 2008-09. The assessee during the financial year 2008-09, purchased a plant and machinery and claimed only 10 per cent. (half of 20 per cent.) as additional depreciation in the return of income for the assessment year 2009-10 as the plant and machinery were put to use for less than 180 days. Hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that : "We have perused the orders and heard the rival submissions. The claim of the assessee is under section 32(1)(iia), which allow additional depreciation for new machinery or plant acquired and installed after 31st March, 2005. The said sub-clause (iia) of section 32(1) reads as under : '32 (1) In respect of depreciation of-. . . (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture and production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Provided that no deduction shall be allowed in respect of- (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house ; or (C) any office appliances or road transport vehicles ; or (D) any machinery or plant, the whole of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 2005-06 and the assessee has also claimed the additional depreciation during that year and the same has also been allowed. Each assessment year is separate and independent assessment year. The provisions of section 32 of the Act do not provide for carry forward of the residual additional depreciation, if any. In the circumstances, the finding of the learned Commissioner of Income-tax (Appeals) on this issue is on a right footing and does not call for any interference. Consequently, ground No.1 of the assessee's appeal stands dismissed.' We are therefore of the opinion that the Commissioner of Income- tax (Appeals) was justified in following the view taken by co-ordinate Bench of this Tribunal. 56. Ground No. 1 of the assessee stands dismissed." 12.1 Respectfully following the above decision of the Tribunal, we decide this issue against the assessee and in favour of the Revenue for these assessment years also. This ground is dismissed. 13. The next issue in I. T. A. No. 444/Mds./15 and I. T. A. No. 560/Mds./15 for the assessment years 2010-11 and 2011-12 is with regard to the disallowance under section 14A read with rule 8D of the Income-tax Rules, 1962. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, it was observed by the Dispute Resolution Panel that the disallowance of expenses under section 14A read with rule 8D is in relation to the earning of the exempt income and not in relation to the exempt income earned as such. The disallowance of expenses is always in relation to the efforts made for earning such exempt income and not proportionate to the exempt income earned. It is particularly so because, in some years the income so earned may be less or nil and therefore, the disallowance to be computed should always be with reference to the investments made in such activity and the effort made therein, as held by the Special Bench of the Income-tax Appellate Tribunal, Delhi in the case of Cheminvest Ltd. v. ITO [2009] 317 ITR (AT) 86 (Delhi) ; [2009] 121 ITD 318 (Delhi). It was also seen from the profit and loss account that the assessee has several activities including investments in shares and for the purpose of making these investments etc., the same management, manpower, machinery and infrastructural facilities of the assessee are being used. Hence, there is an element of expenditure involved in the process and this expenditure may not be direct and thus, there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional High Court in the case of Redington (India) Ltd. v. Addl. CIT [2017] 392 ITR 633 (Mad) (T. C. No. 520 of 2016 dated December 23, 2016) held that (page 639) : "The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC)). The language of section 14A(1) should be read in the context and such that it advances the scheme of the Act rather than distort it." 15.2 Being so, we direct the Assessing Officer to disallow the expenditure under section 14A to the extent of exempted income only. This ground of appeal of assessee is partly allowed. 16. The next issue in I. T. A. No. 444/Mds./15 for the assessment year 2010- 11 is with regard to allocation of research and development expenditure between the eligible unit under section 10B of the Act and the non-el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e involved in the assessment year 2007-08, where the Tribunal directed the Assessing Officer to examine certain factual details and apportion the research and development expenses if the research and development results are being used by the said 100 per cent. export oriented units. Respectfully following the aforesaid decision of the Tribunal, the Dispute Resolution Panel remanded the issue to the Assessing Officer with directions. 18. We have heard both the sides and perused the material on record. We find that this issue was considered by the Tribunal in the assessee's own case for the assessment year 2007-08 in I. T. A. Nos. 266 and 656/Mds/2012, wherein it was remanded the issue to the Assessing Officer with the following observations : "31. We have perused the orders and heard the rival submissions. The dispute is regarding scientific research expenditure of the asses see, which was allocated by the Assessing Officer to the units on which deduction under section 10B was claimed. As per assessee, the research was not related to any of the products manufactured by such units, but was for development of new products. The assessee had claimed weighted deduction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of weighted deduction under section 35(2AB) of the Act. 19.1 The facts of the case are that the assessee during the financial year 2009-10 claimed to have incurred research and development expenditure of Rs. 26,35,82,207 as revenue expenditure and Rs. 2,71,91,273 as capital expenditure. The DSIR, the authority for approving the research and development expenses, has approved the research and development revenue expenses at Rs. 1997.51 lakhs. The research and development expenses approved by the DSIR are eligible for weighted deduction at 150 per cent. under section 35(2AB) of the Act. However, the assessee, in its return of income filed, claimed a weighted deduction of Rs. 39,53,73,310, being 150 per cent. on the entire research and development revenue expenditure of Rs. 26,35,82,207. The Assessing Officer in his order observed that since the assessee's research and development revenue expenses have been approved by the DSIR to the extent of 1997.51 lakhs only, the assessee is eligible to claim weighted deduction at 150 per cent. on these amounts under section 35(2AB) of the Act. Further, the Assessing Officer noticed that since the actual research and development revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative relied on the decision of the Mumbai Tribunal in the case of USV Ltd. v. Deputy CIT (I. T. A. Nos. 4517 and 5582/Mum/2010 for the assessment year 2007-08 dated July 4, 2012) wherein it was held that : "We have carefully considered the submissions of the learned Representatives of the parties and the orders of the authorities below as also the provisions of section 35(2AB) read with rule 6(7A) of the Rules. On a perusal of the provisions of section 35(2AB) of the Act, we do agree with the learned counsel for the assessee that the said section excludes the expenditure in the nature of cost of any land or building from weighted deduction to be allowed under section 35(2AB). The said section 35(2AB) as applicable to the assessment year under consideration along with the explanation reads as under : 'Section 35(2AB) provides that (2AB)(1) Where a company engaged in the business of (bio-technology or in the business of) manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the board incurs any expenditure on scientific research (not being expenditure in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same credit should be given to the assessee in respective assessment years. Accordingly, we remit this issue to the file of the Assessing Officer to give due TDS credit to these assessment years and the assessee is directed to file necessary details to the Assessing Officer. This ground of appeals of the assessee is partly allowed for statistical purposes. 22. The next issue in assessee appeals in I. T. A. Nos. 444/Mds./15 and 560/Mds./16 for the assessment years 2010-11 and 2011-12 is with regard to the levy of interest under section 234C and 234D of the Act which is consequential and mandatory in nature, it is to be decided accordingly. 22.1 In the result, the assessee appeals in I. T. A. Nos. 558/Mds./16, 559/Mds./16, 444/Mds./15, and 560/Mds./16 are partly allowed for statistical purposes. 23. Now, we take up the Revenue's appeal in I. T. A. Nos. 757/Mds./16, 758/Mds./16, 759/Mds./16, 416/Mds./15 and 760/Mds./16 for the assessment years 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12 respectively. 23.1 The first common issue in these appeals is that the Dispute Resolution Panel erred in deleting the addition made towards corporate guarantee. 24. The facts of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the company's associated enterprise had not resulted in any costs to the assessee and hence, the question of realisation of any money from the associated enterprise does not arise. However, the Transfer Pricing Officer argued that it is determined that the corporate guarantees issued by the assessee to banks for the benefit of its associated enterprise's undeniably possess economic value. Moreover, they are international transactions squarely covered under the provisions of section 92B of the Act. The assessee has not charged any service fees from the associated enterprise's or from any one for the risks taken by standing guarantee to the loans. Through the corporate guarantees's, the associated enterprise's have benefitted at the expense of the assessee at no cost. Hence, an arm's length service charge is applicable. According to the Transfer Pricing Officer, since the corporate guarantees is a weaker substitute to BG, the additional risk assumed by the assessee is valued at an arm's length figure of 1 per cent. Hence, 1 per cent. service charge on the USD value of the loans taken by the associated enterprise is due to the assessee for the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the above, by following the order of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. v. Addl. CIT (supra) 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 associated enterprises does not involve any cost to the assessee, therefore, it has no bearing on the profits, income, loss or assets of the assessee and outside the ambit of the international transaction to which the arm's length price adjustment has to be made. According, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition of Rs. 1,84,17,371." In view of the above judgment, we decide the issue in favour of the assessee. This ground of appeals of the Revenue is dismissed. 28. The next issue in Revenue's appeal in I. T. A. No. 416/Mds/16 for the assessment year 2010-11 is with regard to reduction in claim under section 10B of the Act by way of apportionment of exempt income and accordingly reducing the business profit for the purpose of computation of deduction under section 10B of the Act. 29. Regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B could be preferred with the profits of a unit on which deduction under section 10B was not available. This issue, in our opinion, has already been resolved in favour of the assessee by the hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. v. Deputy CIT [2010] 325 ITR 102 (Bom). In the said case, the assessee had four units which were eligible for deduction under section 10B, of which, three units had returned profits, whereas, the fourth unit returned a loss. Deduction was independently claimed for the profits of the section 10B units. Loss of the fourth unit was allowed to be set off against profits of the units on which there was no deduction available under section 10B. Later the assessment was sought to be reopened. Their Lord ships held the reopening done for disallowing set off of the loss of the fourth unit to be invalid. Their Lordships observed that the assessee was entitled to claim deduction in respect of the profits of the three eligible units, and also entitled to claim set off of loss arising in the fourth unit against other business income. We are of the opinion that this decision clearly goes in favour of the assessee. The learned Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tools and their use was totally outside India and also the persons procuring the material and developing the tools are non-residents and the services are rendered outside India, the payments are liable for tax in India. Hence, the assessee claimed that these expenses are outside the purview of the provisions of section40(a)(i) of the Act. 32.1 The assessee claimed in its return of income agency commission of Rs. 55,19,350 and professional and consultancy charges of Rs. 41,71,575. As claimed by the assessee, these services are rendered by the non-residents and outside India and hence, its payments are not liable to tax in India. The warehousing charges of Rs. 3,44,98,431 are paid to the non-residents for the warehousing services rendered outside India. Similarly, the emballage cost of Rs. 1,17,59,919 were also paid to the non-residents for hiring of containers outside India for transporting the exports outside India). These emballage costs are akin to logistics cost. None of the persons who are rendering the agency commission, consultancy, warehousing, emballage costs have permanent establishment in India. These persons are rendering the services outside the country and the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shall be supported by relevant basic documents. All other expenses related to the specific products including ASN (advance shipment note) submission, sample certification, training and other direct expenses related to subject merchandise will be reimbursed. Supporting documents will have to be provided with the invoices. A copy of the agreement entered with nominated agent is to be forwarded to us for our approval/records. You will have to arrange for monthly Stock Statement-"part number wise for us to cover insurance and for monitoring the Stock levels.' With regard to warehousing charges including logistics charges, explanation given by the assessee to the Assessing Officer was as under : 'Freight and warehousing charges-The entire expenditure were wholly incurred outside India in terms of transportation, delivery and logistics costs. Those expenditure being incurred outside India are not liable for deduction of tax at source and those income are not liable for tax in India. Further all those agents do not have any permanent establishments in India. Separate sheet detailing the break-up along with remarks is attached for your perusal. Also we enclose sample copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the Act. In any case, under section 195 of the Act, the assessee is liable to deduct tax only where the payment made to the non-residents is chargeable to tax under the provisions of the Act. In the circumstances mentioned above, the assessee was justified in having a bona fide belief that the payments did not warrant application of section 195 of the Act. In such circumstances, we are of the opinion that it could not have been saddled with the consequences mentioned under section 40(a)(i) of the Act. Disallowances were rightly deleted by the learned Commissioner of Income-tax (Appeals). No interference is called for." 33.1 In view of the above order of the Tribunal, this ground of appeal by the Revenue is dismissed. 34. The next issue in I. T. A. No. 760/Mds/16 for the assessment year 2011- 12 is with regard to depreciation on printers and UPS. The facts of the case are that the Assessing Officer has disallowed depreciation claimed by the assessee at 60 per cent. on printers, scanners and UPS treating the same as office equipment eligible for depreciation at 15 per cent. The assessee submitted that the Assessing Officer should have allowed a higher rate of depreciation at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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