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TMI Blog2017 (12) TMI 1745X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Assessing Officer, with respect to quantification of ALP adjustment, are dismissed as infructuous. Disallowance u/s 14A r.w.r. 8D - HELD THAT:- CIT(A) has merely remitted the matter to the file of the Assessing Officer for a factual verification. There cannot be any infirmity in this approach, and the grievance of the Assessing Officer is devoid of any rationale. It is difficult to understand that when the matter is remitted to the file of the Assessing Officer, how can the Assessing Officer be aggrieved of such a direction. We see no merits in the grievance raised by the Assessing Officer. We, therefore, uphold the order of the learned CIT(A) and decline to interfere in the matter. Notional loss on account of foreign exchange fluctuation loss amounting claimed on account of Mark to Market basis - HELD THAT:- As decided in own case [2017 (4) TMI 1406 - ITAT AHMEDABAD ] the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not at all be appropriate to allow the position to be changed in a subsequent year . In view of these discussions, grievance raised by the Assessing Officer is not maintainable, and is dismissed as such. Fresh claim of the Assessee in respect of Revenue expenditures for issue of debenture of LIC of India - HELD THAT:- We find that it is a well settled legal position that the bar on accepting a fresh claim in assessment proceedings, except by way of a revised return, is only on the Assessing Officer and not the appellate authorities. There is, thus, no infirmity in learned CIT(A) s accepting the claim in principle and remitting the matter to the Assessing Officer for examination of claim on merits. Hon ble jurisdictional High Court has also, in the case of PCIT vs. UTI Bank Ltd. [ 2016 (6) TMI 961 - GUJARAT HIGH COURT] approved this approach. We, therefore, see no merits in the grievance of the Assessing Officer and reject the same. - ITA No. 2074/Ahd/2013, ITA No.2179/Ahd/2013 - - - Dated:- 22-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deserves to be quashed. 4. The interconnected grievances, raised by the Assessing Officer, are as follows :- 4.2). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of ₹ 76,68,700/- out of total addition of ₹ 1,20,92,950/- made on account of guarantee fees on loans availed by Associated Enterprises' of Assessee against guarantee of Assessee. 4.3). The Ld, Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of ₹ 39,02,19,175/- out of total addition of ₹ 42,84,19,175/- made on account of guarantee fees on loans availed by Associated Enterprises' of Assessee against guarantee of Assessee. 5. So far as these grievances of the assessee are concerned, learned representatives fairly agree that the guarantees in question are, to use the words of the CIT(A), continuing guarantees from the immediately preceding year and that except for the figures, entire facts of the case are similar to that of the immediately preceding assessment year 2008-09 . Vide our order dated 21.04.2017, the Tribunal has allowed the appeal of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alt with issue-wise as below: 7.6.1 Providing Corporate Guarantee is not a service: The issue has been dealt with in detail at para 6.6 to para 6.13 in all its facets. As already discussed above provision of service is included in the definition of international transaction. Since providing guarantee has been held to be a service, its benchmarking by the assessee company at 'nil' value has direct impact on its profits. Hence, the claim made by the assessee company that transaction does not represent international transaction and does not merit benchmarking, is not found to be correct. 7.6.2 Stewardship Activity hence not service: At para 2.2, the assessee has claimed that it is performing stewardship activity by standing as a guarantor to the loans raised by the AEs. 7.6.3 Transfer Pricing Provisions are Machinery Provisions: As discussed at para 6.4, the transfer pricing provisions mandates fixing a arms' length price to the transactions between related enterprises for international transactions including rendering of service. That the assessee has chosen to benchmark such service at 'nil and hence has not received consideration, does not render the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame contract agreement, such considerations should not be factored while deciding the current year issues. In this case, there does not appear to be any such link and the assessee has not been able to demonstrate such financial linking. 7.6.6 The assessee's contention regarding commercial expediency and the reliance on the decision of S A Builders Ltd. has been dealt with in other paras of the order relating to same issues and hence this contention is not found acceptable. 7.6.7 Wrong benchmarking of guarantee fee; The assessee has submitted that it has internal CUP in the form of guarantee fee charged by ICICI Bank at 0.70%. The CUP advanced by the assessee is not found acceptable on account of clear non-comparability of the transaction. Hence, it cannot form the basis for computation of guarantee margin in the case of the loans taken by the associate enterprises. The documents relating to the above guarantee have been perused and are discussed at para 7.6.8 and 7.6.9 below. 7.6.8 It is noticed that the assessee is wide off the issue in its attempt to compare the guarantee issued by ICICI Bank with guarantee issued by the assessee with reference to the loans taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st rates, it has been discussed that the risks assumed in respect of a normal rated corporates is anywhere between 4% to 4.5% in Indian context. Hence, the rate of 0.70 advocated by the assessee company is without any basis and unacceptable. The guarantee margin computed elsewhere by this office at 200 bps is most reasonable and based on sound principles of finance and does not require to be altered. 7.6.10 Incorrect allocation of risk to SEL by the TPO: The assessee has stated that attribution of 50% risk to the parent company in respect of joint and several risk liability in relation to the guarantee given by the corporations is incorrect. The assessee has also, in its letter dated 9/8/2011, at annexure-2, furnished working of the guarantee fee to be reasonably charged from the company. As discussed above, the rate of 0.70% adopted by the assessee company is wrong. It is seen that in the computation, the assessee has given a weight of only 14% to SEL while its AEs have been given much higher weightage. The logic put forth by the assessee company is that since the target company is in Germany, any default would first invite action on the German companies, then European companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the apportionment out of total guarantee fee determined. The financial status of the assessee company has been examined. (i) !t is clarified that the loan agreement has been entered into on 7/2/2007. Hence, the assessee's attempt to argue that the status as on 31/3/2008 should be examined is not found acceptable, The bank would have examined the financial status as on the date of giving the loan and not subsequently, especially if the money introduced in the companies is out of borrowed capital. (ii) The financial statement of all the companies who are party to the agreement has been examined. The assessee has based its computation on the balance sheet of 31/3/2008 which also includes cash on accounts of loans drawn by the group companies under this agreement. The contention of the assessee that the cash balance in the bank account of the parties to the agreement should be factored in is also not found acceptable. The cash is out of the loans under the same agreement and has been withdrawn for specific use. Its presence does not reflect excess cash available but cash generated by drawing the loan tranche for purchase of shares. (iii) SEL Mauritius has a capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amt in Euro Ami in INR in Cr in Millions (1 Euro = ₹ 63.3417) SEDT Germany 116.01 735.21 SWEE Germany 0.01 0.06 AERH Netherlands 1.54 9.75 SELM Moritious 1.21 7.66 SEL India as on 31.03.200S 0 875.5 TOTAL 118.83 1,628.19 Thus, suitable adjustment would be required in your proposal with regard to reduction of amount lying in the bank, the rate of the guarantee fee and allocation of amount of guarantee fee after suitable division between all four guarantors. This is without prejudice to our preliminary submission and should not be taken as the admission of the fact that any guarantee fee is chargeable, 7.7.4 The submission made above has been perused. As discussed above, the cash shown in the hands of SWEE Germany, AERH, Net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices to its AEs in respect of loans availed. As regards the guarantee fee computation in respect of the trache V guarantee component being given by ICICI Bank to SE Drive Technik, it is seen that in the agreement itself, the bank has started that if the company provides 100% liquid assets as guarantee, the fee would be reduced to 10%. This means that the Bank is bearing risk to the extent of 0.90% while remaining is its margin for services rendered. The average overall guarantee fee has been computed at 2%. If the bank picks up guarantee related risk to the extent of 0.90%, the remaining risk of 1.1% will be shared by the parties to the agreement, Since, the risk has been determined to being shared in the ratio of 50:50 between the assessee company and rest of the companies, the assessee's share in this comes to 0.55%. All the other AEs have availed of the facilities granted by the credit agreement except the assessee company. Hence, the company should have charged a fee equal to 0.55% in this case from the other AEs in respect of total credit/guarantee facility availed. 7.8 In light of the above discussion, the provision of services relating to guarantee is benchmarked a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing would have been lost. Thus looking to the critical business relationship the Appellant Company had with the SRC it was also commercially beneficial to it to support the said AE to raise loans so that it can increase its sales in USA and save on logistic cost of rotor blades. It is further seen that similarly SEBV Netherlands has obtained a term loan for Guest House from ABN AMRO Bank after mortgaging the Guest House. It was further submitted that the purpose of guest house was to provide accommodation for employees of the Appellant Company only. It has been submitted by the A.Rs. of the Appellant that the guarantee of the Appellant has been obtained merely because the Appellant is a parent company. Since the assets of the AEs are mortgaged against the loan, any bank would have provided loan to the companies and the guarantee was provided by the Appellant only as a parent company. Therefore, I in principle agree with the above justification given by the Appellant for not charging guarantee fees. However, since it's an international transaction and subject matter of transfer pricing regulation, the transaction of guarantee has to be properly benched marked. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the second issue which need to be decided i.e. upward adjustment of ₹ 47,83,93,500/- as guarantee fees on account of joint-guarantee provided to the lenders for providing finance and other arrangements to three AEs to acquire RE Power Systems AG, Germany and to refinance the debt obtained by the Appellant. I have gone through the justification given by the A.Rs. of the Appellant for not charging guarantee fees. My attention is drawn to the Annexure-2 to the letter dated 21/10/2011 furnished the TPO, which is reproduced on pg. 102 to 112 of the written submission submitted before me. Going through the resolution passed by the Board of Directors on 09/02/2007, it is seen that the Appellant wanted to acquire 100% shareholding of leading European Wind Turbine Generator manufacturing company REPower System AG to expand its international business by enlarging its product portfolio with higher capacity. It was accordingly decided to obtain financial facilities of Euro 1575 Million for the purpose of acquiring shares of REPower System AG and for general corporate purposes of the Appellant and other group companies. It was further submitted that internationally it is a preferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the group companies / guarantors had capital base in form of Equity of 20553.32 Crores. Against the said equity base the banks have funded 1he required borrowings, outstanding amount of which was ₹ 6402.79 Crores ₹ 4660.89 Crores + ₹ 1741.90 Crores) resulting in to a debt to equity ratio of 0.31:1 which is well below the accepted norms of long term lending of 4:1.Based on the equity commitment by management, it was quite possible that any company could have availed the said loan without any third party guarantee from the Banks at the prevailing market rates. Further I find that negative pledge of the assets of all the borrowers was created and the total assets base of all the companies put together was at ₹ 240835.79 Million, whereas, the outstanding balance of borrowed loan was at ₹ 64027.90 Million, hence the borrowed loan was secured by 3.76 times by the assets base, and therefore, in the process the loan became the least risky loan. Therefore contention of the Appellant which justifies the action of the Appellant in not charging guarantee fees, as the loan was the not at all risky since the same was secured by the net worth and net asset of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or not. My attention is drawn to working given on Pg. No.258-260 of P/B. Going through the said working, it is seen that the Appellant has adopted benchmark rate of 0.75% as guarantee fees and has quantified the amount of total guarantee fees at ₹ 41.77 Crores. Thereafter, the same guarantee fees has been allocated in between the co-guarantors on the basis of Weightage Average of Net Assets of the Companies, and accordingly, the weightage of the Appellant Company comes to 14.01% towards total guarantee fees, which results info amount of ₹ 5.84 Crores. I have also seen the notes mentioned below the chart justifying the different weightage given to the co-guarantors. I am of the opinion that allocation as done by the Appellant is rational and done on logical basis since the allocation has been made on the basis of the Net Assets of the Companies which will be available in case of default committed by the borrowers in repaying the borrowed amount. Therefore, I agree with guarantee fees being allocated on the basis of net assets of the companies and hold that the contribution of the Appellant in the total guarantee fees shall be restricted to 14.01% which results into gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f international transaction (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction'' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised workforce, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.' 22. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions' by the virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered by 2(b) and 3 above in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises . That leaves us with two clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause no borrowings were resorted to by the subsidiary from this bank. 31. In this light now, let us revert to the provisions of clause (c) of Explanation to Section 92B which provides that the expression 'international transaction' shall include 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 . In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intraAE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case.' 23. Learned Departmental Representative submits that this decision is no longer good law in the light of Everest Kanto Cylinders Ltd. decision (supra) and Vodafone India Services (P.) Ltd. decision (supra) by Hon'ble Bombay High Court. 24. As for Hon'ble High Court's judgment in the case of Everest Kanto Cylinders Ltd. (supra), it is necessary to appreciate the fact the assessee was charging a .5% commission on issuance of corporate guarantees, on behalf of the AEs, and it could not, therefore, be said that the transaction will have no impact on profits, incomes, losses or assets of such enterprise . This aspect of the matter is clear from an observations in the related Tribunal order, which is reported as Everest Kanto Cylinders Ltd (supra), to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed. 25. We are unable to see, in the judgment of Hon'ble Bombay High Court, any support to the proposition that issuance of corporate guarantees is inherently within the ambit of definition of 'int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated outside India. 216. Two aspects of a transfer are clarified - the asset itself and the manner in which it is dealt with. The asset is no longer restricted to the asset per se or a right therein, but also extends to any interest therein . Prior to the amendment, the words any interest therein were absent. Further, the nature of the disposal is also expanded. It now includes the creation of any interest in any asset. Moreover, the disposal of or creation of any interest in the asset may be direct or indirect, absolute or conditional, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a non-obstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. It would be evident, therefore, that a lot more must now be seen and considered than before while arriving at a conclusion whether the terms and conditions of the Framework agreement constituted a transfer or assignment of the call options by one party t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226.' (Emphasis supplied) 27. Revenue's emphasis is on the last two sentences in paragraph No 213 which state that The effect of the amendment would have to be considered. It cannot be brushed aside but in doing so what it overlooks is the subsequent observations highlighted above which recognize the fact that merely because a subsequent Explanation is introduced by the legislature, it is not an open and shut case against the assessee or the revenue, and that all these observations are in the context that there is no justification for withdrawing the proceedings from the channel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226 . When Their Lordships have made it clear that they would not like to bypass the channels under the Income-tax Act and proceed to decide these issues in writ jurisdiction under article 226, there cannot obviously be any question of Their Lordships decidin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 530, Hon'ble Supreme Court had cautioned that It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. That precisely, however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services (P.) Ltd. (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative's reliance on Hon'ble Bombay High Court's judgments in the cases of Everest Kanto (supra) and Vodafone India Services (supra) is wholly misplaced and devoid of any merits. As for coordinate bench decision in the case of Hindalco Industries (supra), all it does is to follow the Everest Kanto decision by Hon'ble Bombay High Court, but then, as we have seen earlier, that was a case in which Their Lordships were in seisin of a situation in which guarantee commission was actually charged by the assessee. That is not the case before us. The coordinate bench decisions dealing with the situations in which the guarantee commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: (7.1) Sub-section (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this subsection referred to as the parent ) in a taxation year of the parent for the provision of a guarantee to a person or partnership (in this sub-section referred to as the lender ) for the repayment, in whole or in part, of a particular amount owing to the lender by a non-resident person, if (a) the non-resident person is a controlled foreign affiliate of the parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing; and (b) it is established that the particular amount would be an amount owing described in paragraph 17(8)(a) or (b) if it were owed to the parent. (http://www.fin.gc.ca/drleg-apl/ita-lrir-dec12-l-eng.pdf) 31. It is also important to bear in mind the fact that, under the Canadian law, the definition of 'international transaction', unlike an exhaustive definition under section 92B of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone. 32. As we take note of the above legal position in Canada, it is appropriate to take note of the concept of 'shareholder activities' in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certain conditions, from the scope of transfer pricing adjustments. Taking note of these proposed amendments, 'Transfer Pricing and Intra Group Financing by Bakker Levvy, IBFD publication (ISBN- 978-908722-153-9)' observes that Proposed sub-section 247(7.1) of the ITA provides that the transfer pricing rules will not apply to guarantees provided by Canadian parent corporations in respect of certain financial commitments of their Canadian controlled foreign affiliates to support the active business operations of those affiliates . As to what could be conceptual support for such an exclusion, we find interesting references in a discussion paper issued by the Australian Tax Officer in June 2008 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es . In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi-capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' itself recognizes the distinction between a shareholder activity and a provision for services, when, contrasting the shareholder activity with broader term stewardship activity and thus highlighting narrow scope of shareholder activity, it states that Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre . It proceeded to add, in the immediately following se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces , the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra-group services- first, whether intra-group services have indeed been provided, and, second- if the answer to the first question is in positive, that charge to these services should be at an arm's length price. Dealing with the first question, which is relevant for the present purposes, these Guidelines (2010 version) state as follows: '7.6 Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: (a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; (b) Costs relating to reporting requirements of the parent company including the consolidation of reports; (c) Costs of raising funds for the acquisition of its participations. In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member. The 1984 Report also mentioned costs of managerial and control (monitoring) activities related to the management and protection of the investment as such in participations . Whether these activities fall within the definition of shareholder activities as defined in these Guidelin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. v. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee fees as payment for services under section 482 is inconsistent with its treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). 39But cf Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages). 37. We are in agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d arm's length. Benefit test implies the recipient group member should get economic or commercial value to enhance its commercial position . The benefit test is interlinked with the an arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, as we have noted earlier, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible in arm's length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. 39. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred per cent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarantee with a corporate guarantee. The guarantees are issued without any security or underlying assets. When these guarantees are invoked, there is no occasion for the guarantor to seek recourse to any assets of the guaranteed entity for recovering payment of defaulted guarantees. The guarantees are not based on the credit assessment of the entity, in respect of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi-capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. 42. As observed by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), a re-characterization of a transaction is indeed permissible, inter alia, in a situation (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner . The case of a corporate guarantee clearly falls in the second category as no independe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interestbearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.' 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner . No bank would be willing to issue a clean guarantee, i.e. without underlying asset, to assessee's subsidiaries when the banks are not willin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion services. As a matter of fact, even in the Explanation to Section 92B- which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. Of course, the global best practices seem to be that guarantees are sometimes included in 'services' but that is because of the extended definition of 'international transaction' in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm's length price adjustment, apart, Transfer Pricing and Intra-Group Financing by Bakker Levvy (ibid) notes that the IRS has issued a non-binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis supplied), a guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which states that For the removal of doubts, it is hereby clarified that (i) the expression international transaction shall include .. (c) 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. There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date . What is implicit in this statutory provision is that while impact on profit, income, losses or assets is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for contingent impact on profit, income, losses or assets but on future impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution. 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that for the removal of doubts , as we have noted earlier in this decision, clarified that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification did indeed go well beyond what a coordinate bench of this Tribunal held to be the legal position and we are bound by the esteemed views of the coordinate bench. We are, therefore, of the opinion that the Explanation to Section 92B did indeed enlarge the scope of definition of 'international transaction' under section 92B, and it did so with retrospective effect. If, for argument sake, it is assumed that the insertion of Explanation to Section 92B did not enlarge the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy SPD v. Union of India [2006] 281 ITR 305/151 Taxman 286 (SC), wherein Their Lordships had, inter alia, observed that the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. It was for this reason that a coordinate bench of this Tribunal, in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . decision (supra) had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post-amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel Ltd. decision (supra) on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific' Corp Ltd. case (supra), as indeed in any other case so far, it was not the case of the assessee that corporate guarantees are quasi-capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se in general constitutes a 'international transaction' under section 92B would have been somewhat academic question on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better. 7. We are in considered agreement with the views so expressed by the coordinate bench. Learned Departmental Representative s well researched arguments donot persuade us to deviate from the stand so taken by us. Let us deal with these arguments in little detail. 8. Learned Departmental Representative, in his written note, accepts that the legislature brought in amendment (in Section 92B) by the Finance Act, 2012, after the decision of Four Soft Ltd dated 14/09/2011 . He points out that the decision of the Tribunal, in the case of Bharti Airtel (supra), is per incurium because there were two decisions of this Tribunal, in the case of Everest Kanto Cylinders Ltd Vs DCIT [(2012) 34 taxmann.com 9 (Mum)] and Mahindra Mahindra Ltd Vs DCIT [2012- TII-70-ITAT-Mum], which were not considered by the Bharti Airtel decision. Our atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court in ITA No. 607/2014 against the order passed by the Tribunal in the case of Bharti Airtel (supra). While no doubt the matter is now pending before Hon ble High Court for the judicial scrutiny by Their Lordships, that fact by itself does not reverse the stand taken by the Tribunal in the order so impugned. As regards the decision of Bharati Airtel being on its own peculiar facts, there can be no denial of this position but that does not mean that the so far as issues of general application are concerned, the stand of the Tribunal cannot hold good. Learned Departmental Representative then takes us through the Explanation to Section 92 B to explain its true scope and through Bharti Airtel decision as to how fallacious is its logic. Its emphasized that the impact of issuance of bank guarantees, on the profits, income, losses or assets of such enterprises, is real and not contingent as held in Bharti s case. It is also emphasized, apparently to highlight the fact that it is not only the impact on entity issuing the guarantee but also beneficiary of the guarantee that matters in this context, that the word used in section 92 B is enterprises and not enterprise . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed certain issues which were already subjected to a judicial interpretation in a particular manner. Learned Departmental Representative does not even dispute it. He is candid enough to place on record the fact, by way of a written note, that the one of the reasons of insertion of Explanation to Section 92 B was to nullify the Four Soft decision (supra). The judicial interpretation so given was certainly not the end of the road. The matter could have been carried in appeal before higher judicial forums. If the decision of a judicial body does not satisfy the tax administration, nothing prevents them from going to the higher judicial forum or from so amending the law, with prospective effect, that there is no ambiguity about the intent of legislature and it is conveyed in unambiguous words. 10. Nullifying a judicial interpretation though legislative amendment, much as many of us may abhor it, is not too uncommon an occurrence. Of course, when legislature has to take an extreme measure to nullifying the impact of a judicial ruling in taxation, it is the time for, at least on a theoretical note, introspection for the draftsman as to what went so wrong that fundamental intent of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs New Skies Satellite BV [TS-64- HC -DEL (2016)], observed as follows: 30. Undoubtedly, the legislature is competent to amend a provision that operates retrospectively or prospectively. Nonetheless, when disputes as to their applicability arise in court, it is the actual substance of the amendment that determines its ultimate operation and not the bare language in which such amendment is couched .. 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the legislature characterizes an amendment as retrospective that the Court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the assessee vis- -vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced . We may add that right now we are only concerned with the question of retrospective amendment in the transfer pricing legislation, which has, as we will see, its own peculiarities and significant distinction with normal tax laws which simply impose tax on an income. 14. Legislature may describe an amendment as clarificatory in nature, but a call will have to be taken by the judiciary whether it is indeed clarificatory or not. This determination, i.e. whether the amendment in indeed clarificatory or is the amendment to overcome a judicial precedent, assumes great significance because when it is found that the purpose of such interpretive statute, or clarificatory amendment, is correct a judicial interpretation of prior law, which the legislature considers inaccurate, the effect is prospective and, as in this case, it deals with transfer pricing legislation which essentially seeks a degree of compliant behavior from the assessee vis- -vis certain norms- the norms the assessee should know at the time of entering into the transactions rathe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India [(2006) 281 ITR 305 (SC)], observed as follows: The other relevant maxim is, lex non cogit ad impossibilia-the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. [See : U.P.S.R.T.C. vs. Imtiaz Hussain 2006 (1) SCC 380, Shaikh Salim Haji Abdul Khayumsab vs. Kumar Ors. 2006 (1) SCC 46, Mohammod Gazi vs. State of M.P. Ors. 2000 (4) SCC 342 and Gursharan Singh vs. New Delhi Municipal Committee 1996 (2) SCC 459]. 18. It is for this reason that the Explanation to Section 92 B, though stated to be clarificatory and stated to be effective from 1st April 2002, has to be necessarily treated as effective from at best the assessment year 2013-14. In addition to this reason, in the light of Hon ble Delhi High Court s guidance in the case of New Skies Satellite BV (supra) also, the amendment in the definition of international transaction under Section 92B, to the extent it pertains to the issuance of corporate guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. As a corollary to this proposition, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an intended consequence of Section 40(a)(ia). If it is not an intended consequence i.e. if it is an unintended consequence, even going by Bharti Shipyard decision (supra), removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively . Revenue, thus, does not derive any advantage from special bench decision in the case Bharti Shipyard (supra). 9. On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an intended consequence to punish the assessee s for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. 21. While approving this approach, and upholding the decision of the Tribunal do read these provisions as effective from 1st April 2005, Hon ble Delhi High Court, in case of CIT Vs Ansal Landmark Townships Pvt Ltd [(2015) 377 ITR 635 (Del)], has observed as follows: 14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , entire ALP adjustment stands deleted. As for the quantum of this adjustment, which is mainly the subject matter of grievance raised in revenue s appeal, once the entire ALP adjustment stands deleted, that aspect of the matter is wholly academic and does not call for any adjudication by us. 25. Ground no. 3 in the Assessing Officer s appeal is thus dismissed as infructuous, and ground nos. 4,5,6 and 7 in the assessee s appeal are thus allowed in the terms indicated above. 6. We see no reasons to take any other view of the matter that the view so taken, by the co-ordinate bench, for the immediately preceding assessment year. We, therefore, uphold the grievances of the assessee and delete the impugned ALP adjustments. 7. As we have held that no such ALP adjustment is permissible, grievances raised by the Assessing Officer, with respect to quantification of ALP adjustment, are dismissed as infructuous. 8. As we part with the matter, we may add that a substantial question of law on this issue, in the case of Micro Ink Limited the decision followed by us in coming to our aforesaid conclusions, has been admitted by Hon ble jurisdictional High Court and the issue is thus p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, direct the Assessing Officer to verify the same and delete the excessive disallowance of ₹ 4,10,87,892/-. Hence, these grounds of appeal are allowed. 13. The Assessing Officer is aggrieved of the relief so granted by the learned CIT(A) and is in appeal before us. 14. Having heard the rival contentions and having perused the material on record, we find that the learned CIT(A) has merely remitted the matter to the file of the Assessing Officer for a factual verification. There cannot be any infirmity in this approach, and the grievance of the Assessing Officer is devoid of any rationale. It is difficult to understand that when the matter is remitted to the file of the Assessing Officer, how can the Assessing Officer be aggrieved of such a direction. We see no merits in the grievance raised by the Assessing Officer. We, therefore, uphold the order of the learned CIT(A) and decline to interfere in the matter. 15. Ground no.1 is thus dismissed. 16. In ground no.2, the Assessing Officer has raised the following grievance :- 2). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in allowing notional loss on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of foreign exchange rates as at the end of the year. Reliance was also placed on Hon ble Supreme Court s judgment in the case of CIT Vs Woodward Governor India Pvt Ltd [(2009) 312 ITR 254 (SC)] in support of deductibility of this foreign exchange loss. None of these submissions, however, impressed the Assessing Officer. Relying upon CBDT Instruction No. 3 of 2010, the Assessing Officer proceeded to disallow this claim on the ground that the loss had not crystallized and the loss was only notional. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the said disallowance. While doing so, in a very well reasoned and analytical order, learned CIT(A) observed as follows: I have carefully perused the assessment order and the submissions given by the appellant. It is to be seen as to whether the Appellant has satisfied the test laid down by the Supreme Court of India in the case of CIT Vs. Woodward Governor India (P) Ltd. [312 ITR 254 (SC)] to know whether the foreign exchange loss incurred during the year under consideration is allowable to the Appellant or not. Each of such condition laid down by the Apex Court is discussed hereunder: Condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year. In CIT vs. R. B. Construction 202 ITR 222 (AP)(FB), it has been held that if rule is not considered, the decision becomes per incuram. In as much as the Appellant has followed the accounting treatment which is in conformity with Accounting Standard 11 issued by the ICAI. Various authorities have held that while determining allowability of an expenditure, accounting standard has a great persuasive value: Challapalli Sugars Ltd. Vs. CIT (1975) [98 I.T.R. 167 (SC)]. Further following authorities have held that foreign exchange fluctuation loss suffered on account of circulating capital or revenue account should be treated as revenue expenditure in the year in which the devaluation takes place when the method of accounting followed is mercantile. 116 ITR 1 (SC) 154 ITR 460 (Cal) 90 ITR 323 (Ker) ' 97 ITD 125 (Ahd) (TM) @ 151 para 8.28 Accordingly, this itself establishes that the Appellant has adopted the system of accounting which is fair and reasonable and supported by the Accounting Standard AS -11, Rule 115 and various authorities and not adopted to avoid incidence of income tax. And in any case, as submitted by the Appellant, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 50.11 crores as at the year end date and foreign exchange gains of ₹ 27.95 crore as at the year end date. What has been done by the Assessing Officer to take into account gains on such contracts but ignore the cases in which losses are computed in respect of the forward contracts. It is against this approach that the assessee had raised the grievance. 7. In the case of Woodward Governor (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon ble Supreme Court and there was similar inconsistency in treatment to losses and gains on the forward contracts. Their Lordships, dealing with this issue and holding that such a loss will be deductible in computation of business profits, observed as follows: .it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant Accounting Standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well established, that, on general principles of commercial accounting, in the P L account, the values of the stock-in-trade at the beginning and at the end of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AS-11 deals with effects of exchange differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words monetary items are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word paid is defined under s. 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows : Sec. 28. Profits and gains of business or profession-The following income shall be chargeable to income-tax under the head Profits and gains of business or profession , - (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Sec. 29. Income from profits and gains of business or profession, how computed-The income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 37. General-(1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession. Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any expenditure not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head Profits and gains of business . In ss. 30 to 36, the expressions expenses incurred as well as allowances and depreciation has also been used. For example, depreciation and allowances are dealt with in s. 32. Therefore, Parliament has used the expression any expenditure in s. 37 to cover both. Therefore, the expression expenditure as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee. 15. For the reasons given hereinabove, we hold that, in the present case, the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act 8. In the present case also, the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66 ITR 170). The relief granted by the learned CIT(A), on this issue, is thus vacated. 22. Ground no.3 is thus allowed. 23. In ground no.4.1, the Assessing Officer has raised the following grievance:- 4.1). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting upward adjustment of ₹ 14,91,87,270/- made on account interest charged on the loans granted to the Associated Enterprises' at discounted rate to the prevailing Market rate. 24. So far as this issue is concerned, it is sufficient to take note of the fact that in the impugned CIT(A) s order, he has merely followed his order for the assessment year 2008-09 which has not been challenged, on this point, by the Revenue authorities. Learned Departmental Representative does not dispute this fact. 25. In the light of the above factual position, it is clear that once the Revenue authorities accept the stand of the CIT(A) on an issue and allow it to reach finality in one assessment year, it cannot be open to them to challenge the same in the subsequent assessment year. As noted by Hon ble Supreme Court, in the case of CIT vs. Radhasoami Satsang [(1992) 193 ITR 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected only on technical ground. The A.Rs. of the Appellant submitted before me that though the Apex Court's decision in the case of Goetze (supra) bars the assessing officer to accept the fresh / new claim otherwise than the revised return of income, the same restriction is not imposed on the appellate authorities including the first appellate authority. I have also gone through the various case laws including decisions of the Gujarat High Court relied upon by the Appellant. On going through the decisions of the Gujarat High Court in the case of Arv/'nd Mills Ltd.(supra) and Symphony Comfort Systems Ltd-(supro)(pg. nos.599-607 of P/B), it is adhered that the Apex Court's decision Goefze (supra) bars only the assessing officer to accept the additional / fresh claim during the course of assessment proceedings without filing revised return of income. However, the Appellate Authorities are empowered to accept the fresh claim which was not made in the original or revised return or even in the assessment proceedings, I have also gone through the various decisions relied upon by the Appellant on pg. nos.31-32 of written submission, which have also laid down the same pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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