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TMI Blog2021 (9) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued; b. Not appreciating that the provision for employee long terms service benefit is in accordance with provisions of Accounting Standard (AS) 15 - Employee benefit and based on actuary valuation; and c. Holding that employee long term service benefit liability has not crystallized nor has accrued. Grounds related to corporate tax (Miscellaneous expenses) 12. The learned CIT(A) has erred in allowing only 10% of Rs. 73,91,476/- incurred towards construction the School Building, Installation of water purification Plant and Promotion of Japanese Language, without appreciating that the expenses are incurred to promote Toyota Brand and to create awareness about Toyota Products. Hence the expenses are wholly and exclusively for the purpose of business and are allowable. Grounds related to corporate tax (MTM Loss/Gain) 13. The learned CIT(A) has erred in confirming the action of the AO in: a. Disallowing a sum of Rs. 1,76,80,000/-, being mark to market loss on outstanding derivative contracts on the ground that same is notional loss. b. Not appreciating that such mark to market loss is in accordance with provisions of applicable Accounting Standard and allowable as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is to be allowed as deduction. The CIT(A) rejected the contentions of the assessee by observing as under:- "69. I have examined the issue. The appellant is having a scheme wherein it gives a gold coin weighing ten grams to an employee who has completed ten years during the Financial Year. As per the information furnished before me the scheme has started during the Financial Year 2011-12. The date for various years was asked which was furnished as shown in the table above. 70. I asked a question to the appellant's representatives during the hearing as to what happens to an employee who has quit after completing nine years nine months in the organization. It was submitted that such an employee does not get a gold coin. 71. The appellant in the para no. 7.34 of the submission has claimed that in case of provision for employee long term service benefit liability, making of the company policy is the event which gives rise to the obligation. I do not agree with this claim. 72. I find that the liability to pay to an employee accrues on the day employee completes ten years in the organization and not before that. In my view the appellant can create a provision (which will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A copy of the actuary valuation is placed at page 1221 of the paper book filed by the assessee. The AS-15 dealing with "employees benefits" defines the term "employees benefits" to include "other long term employee benefit". The extract of the Accounting Standard reads as follow:- "(c) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing bonuses and deferred compensation; and" 3.4.1. Therefore, if any company provides any long term service benefit to its employees, then the recognition, measurement and disclosure requirements laid out under AS-15 is required to be adhered to. The liability in this case might arise on account of employees completing 10 years of service in future, is therefore, required to be quantified and recognized over a period of time in accordance with the Accounting Standards. "Accrual" is one of the fundamental accounting assumption. The term accrue is not defined in the Act. As per AS-1 (Disclosure of accounting policies), Accrual presupposes that the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble deduction. The Hon'ble Supreme Court reserved the Hon'ble High Court's conclusion by observing as above. 3.4.3. Therefore, taking into account the judicial pronouncements and the AS-15, we hold that if the liability is an known liability and the estimation of liability is reliable, the provision made for the relevant assessment year cannot be stated to be a contingent liability. In this case, the actuary valuation for claiming provision of Rs. 46,60,033 for the relevant assessment year is placed on record at page 1221 to page 1233 of the paper book filed by the assessee. On perusal of the same, it is not clear as regards the basis of arriving of the above stated provision. In simple terms, if the assessee had made a provision on proportionate basis, i.e., taking into account 10% on an year to year basis for gifting the memento on completion of 10 years of service, we could have understood the valuation report is based on some reasonable basis. Further, when the employee leaves the assessee-company prior to completion of ten years, how the provision is reduced on year to year basis, is also not explained. Before us, no explanation was offered as regards how the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards expenditure incurred for improving Government School in Manchanayakanahalli Village, it was submitted that the expenses were for the purpose of business, for the following reasons:- (a) Help its employees' children in getting quality education facilities; (b) Ensure that its employees do not migrate in search of better educational facilities; (c) Uplift the morale of the employees and make them more productive; (d) Improve the brand image of Toyota in Manchanayakanahalli and nearby villages. 4.2. As regards the expenditure incurred for installation of water purification plant Byramangala Village, which is 2.5 kms. away, it was submitted that the construction of water purification plant would ultimately benefit assessee's employees and families in getting quality health and it ensure more efficiency at work. It was stated that the expenditure incurred for installation of water purification plant is wholly and exclusively for the purpose of business for the following reasons:- (a) Help its employees and their families in getting quality drinking water; (b) Uplift the morale and health of the employees and make them more productive; and (c) Improve the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% of the total expenditure would have benefitted the employees of the assessee-company. Accordingly, we allow a sum of Rs. 22,17,441 out of the total expenditure of Rs. 73,91,476. It is ordered accordingly. 4.8. In the result, ground No. 12 is partly allowed. Ground No. 13 5. During the year under consideration, the assessee had planned to increase the overall capacity of the plant from 2,10,000 units to 3,10,000 units. The assessee, therefore, required funds to make investment in plant and machinery. The assessee approached bankers and availed Buyers Credit Loan facility from BTMU, Citi Bank and SCB Banks for investment in plant and machinery. The loan facility extended by BTMU, Citi Bank and SCB banks were denominated in Foreign Currency and the interest rate was benchmarked against LIBOR. To protect against fluctuations in foreign currency exchange rate and LIBOR, the assessee entered into hedge transaction with respective banks from whom it had borrowed under buyer's credit. The hedging transaction entailed the following: (a) Floating LIBOR interest rate with fixed interest rate; and (b) Eliminated foreign exchange rate fluctuation on interest/principal payments usi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he outstanding liability relating to forex transaction on revenue account at the end of the year should be recognized in the P&L account for the reporting period. (ii) In view of this, it is clear that the Hon'ble Supreme Court has not adjudicated or decided the issue with respect to mark to market loss on forward contract. Therefore, this decision is not applicable to the facts of the case on hand. 7.7 Accordingly, in the light of the Board's instruction, it is held that the 'marked to market losses' claimed by the assessee on account of restatement of receivables at the end of the financial year on the basis of forward contracts are not allowable as revenue expenditure. Hence, the entire loss claimed by the assessee of Rs. 1,76,80,000 is disallowed and added back to the income of the assessee." 5.4. On further appeal, the CIT(A) confirmed the view taken by the Assessing Officer. The relevant finding of the CIT(A), reads as follow:- "87. The original loan is a variable interest loan. It is linked to LIBOR. Further, there is a risk of fluctuation of currency. The appellant through hedging transaction converted the variable interest loan in fixed interest loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT v. Woodward Governor India P. Ltd. [ (2009) 312 ITR 254 (SC)], reiterated in the case of Oil and Natural Gas Corporation Ltd. v. CIT [ (2010) 322 ITR 180 and in the case of CIT v. Maruti Udyog Limited [ (2010) 320 ITR 729]. Further, underlying reason for availing the foreign loans are for purchase of plant and machinery, which is admittedly is on the capital front and cannot be allowed as a revenue expenditure. Therefore, the CIT(A)'s order confirming the assessment order on this issue is in accordance with law and no interference is called for. It is ordered accordingly. 5.8. In the result, ground No. 13 is dismissed. ITA No. 2016/Bang/2018 (Asst. Year 2013-14) (Revenue's appeal) 6. The grounds raised in Revenue's appeal read as follow:- "1. The order of the Ld. CIT(A) is opposed to law and facts of the case. 2. Whether CIT(A) is right in law in excluding M/s. Tata Motors Ltd. as comparable, since it has passed the RPT filter. 3. Whether the Hon'ble CIT(A) right in fact and in law in allowing liabilities and provisions written back as operative which would result into abnormal adjustment and would make the profit earned within the permi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suzuki India Limited as comparable companies by holding that these companies was having RTP in excess of 25%. The TPO selected the above two companies as comparables. The TPO in his order relied on Tribunal's order in the case of Support Soft India for assessment year 2005-2006 in IT(TP)A No. 1372/Bang/2011. 7.1. Aggrieved, the assessee preferred an appeal to the first appellate authority. According to the assessee, TPO had applied 25% filter, but there is no discussion in the order passed u/s. 92CA of the I.T. Act whether the said filter has been applied by aggregating both income and expenses transactions or has been applied separately for both income and expenses transactions. The CIT(A) requested for remand report from the TPO. The TPO in his remand report dated 21.03.2018, computed RPT ratio of both Tata Motors Limited and Maruti Suzuki India Ltd. According the AR, the TPOs tabulation of RPT ratio is individually for income and expenses transactions (RPT income/total sales and RPT expenses/total expenses) instead of tabulating the same on aggregate basis. The assessee filed a rejoinder to the remand report submitting that the RPT should be computed on aggregate basis. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculated taking both RPT income transactions plus RPT expenses transactions on aggregate basis. On the facts of this case, it is not clear how RPT ratio has been calculated for Tata Motors Limited vis-à-vis other comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. 7.5. Therefore, ground No. 2 is allowed for statistical purposes. Ground Nos. 3 and 4 - Provision Written back - Operating in Nature 8. The assessee had written back provision of Rs. 18.48 crore that was no longer required. The same was credited to the profit and loss account. While computing the margin, the assessee treated the same as operating in nature. The TPO treated the same as non-operating in nature (however, there was no reasoning given by the TPO in adopting such a stand). 8.1. Aggrieved, the assessee preferred an appeal to the first appellate authority. Before the first appellate authority, it was submitted that reversal of provision is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Business Solutions India (P.) Ltd. v. DCIT [2020] 116 taxmann.com 716 (Bangalore - Tribunal) (b) Maxim India Integrated Circuit Design Pvt. Ltd. v. DCIT [IT(TP)A No. 1573/Bang/2017 dated 02.11.2020. 9.4. In view of the above judicial pronouncements, we hold that the CIT(A) is justified in directing the AO to grant working capital adjustment. It is ordered accordingly. 9.5. Therefore, ground Nos. 5 and 6 are allowed. Ground Nos. 7 and 8 - TP adjustment should be restricted to AEs transactions. 10. The assessee submitted before the AO/TPO that out of the total transactions which it had entered into, only 52.07% of the transactions are with its AEs, whereas, balance transactions are undertaken with third parties. The assessee requested the TPO to restrict the TP adjustment to only AEs transaction. The TPO, however, did not accept the contention (there is no discussion on this aspect in the order of the TPO). 10.1. Aggrieved, the assessee preferred an appeal to the first appellate authority. Before the CIT(A), the assessee filed detailed submissions why TP adjustment should be restricted to AEs transactions. The CIT(A) requested for a remand report from the TPO on this issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to follow consistent approach and should adopt net sales as denominator for the purpose of comparing royalty in case of comparables and the assessee. 11.2. Aggrieved, the Revenue has raised this issue before the Tribunal. The learned DR supported the order of AO/TPO. 11.3. The learned AR reiterated the submissions made before the Income Tax Authorities. 11.4. We have heard rival submissions and perused the material on record. The AO/TPO had made TP adjustment for shortfall in margins as well as royalty. The royalty adjustment has been made despite royalty being part of operating cost, although the royalty adjustment is held by the TPO as subsumed within the margin adjustment. We are of the view that once the net profit margin is tested on touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length. In taking the above view, we rely on the order of the ITAT in assessee's own case for assessment year 2007-2008 in IT(TP)A No. 1315/Bang/2011, wherein the Tribunal had held that the royalty payment made by the assessee are at arm's length price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage restructuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) 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 OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. The Hon'ble Court held that it is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd. 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with this conclusion after examining the facts of the appellant's case and the evidences available. The TPO's argument that no benefit was derived by the appellant from the technology for which royalty was paid is not supported by facts and evidences. The fact that the royalty rate was within the permissible limit specified by the Govt. of India and approved by the RBI is an additional argument in support of the legitimacy of the said payment. 10.4 In view of the above discussion, the TPO's determination of the ALP of the royalty payment at 'nil' cannot be supported. For such ALP determination, a proper analysis of comparables is required to be performed for FY 2004-05 and the TPO is directed to identify suitable comparables and, after providing adequate opportunity to the appellant to determine the appropriate ALP of royalty payment. For statistical purposes, the grounds raised in this regard are treated as allowed." 50. The facts and circumstances remain the same in the present assessment year as it prevailed in the earlier assessment year decided by the CIT(A)/DRP referred to above. We are of the view that the findings of the CIT(A)/DRP have to be u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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