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TMI Blog2023 (6) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... re. We further observe that the aforesaid expenditure towards plant repairs and maintenance constitutes only 2.48% of the Gross Block of Plant and Machinery and further this percentage is lower as compared to the previous two assessment years i.e. AY 2006-07 (2.63%) and AY 2007-08 (2.62%). Accordingly, we are of the considered view that the aforesaid expenditure is allowable as revenue expenditure. Loss accrued on foreign exchange derivatives - assessee entered into contracts to convert its export realization in Euro into USD to pay for its imports in USD.held that losses of foreign exchange derivatives on outstanding contracts are notional and contingent in nature and cannot be allowed as per Instruction No. 2/2020 issued by CBDT on 23.03.2010 - HELD THAT:- We observe that this issue is directly covered in favour of the assessee by order of ITAT Ahmedabad in assessee s own case for A.Y. 2009-10, 2010-11 and 2011-12 in [ 2021 (11) TMI 766 - ITAT AHMEDABAD] wherein the ITAT has allowed the assessee s appeal. Disallowance on account of expenses claimed in respect of turnkey project - AO held that the assessee has only claimed the expenses on an estimated basis on per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility during the year under consideration. Therefore, this ground of appeal of the revenue is dismissed. Disallowance u/s 40(a)(i) - sales commission expenses and recruitment expenses on the ground that assessee has not deducted TDS on the aforesaid payments - HELD THAT:- We observe that with respect to payments towards recruitment charges similar issue has been decided in favour of the assessee, in assessee s own case [ 2021 (11) TMI 766 - ITAT AHMEDABAD] by ITAT Ahmedabad for A.Ys. 2009-10, 2010-11, 2011-12 as held since the Assessing Officer has not disproved the fact that assessee has made payment on account of reimbursement of expenditure on which no TDS is deductable. Therefore, this ground of appeal of the Revenue stands dismissed. No TDS was required to be deducted on payments made towards reimbursement of recruitment charges. With respect to commission paid to various parties for services carried out outside of India and is related to earning of income outside of India and hence, such payment falls within the Exceptions provided in Section 9(1)(vii)(b) of the Act. We observe that the Ld. D.R. has not brought anything to controvert the findings given by Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2347/Ahd/2018, I.T.A. No. 2292/Ahd/2018 - - - Dated:- 26-5-2023 - SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER For the Appellant : Shri Vartik Choksi, Shri Biren Shah Shri Drunal Bhatt, A.Rs For the Respondent : Shri Sudhendu Das, CIT D.R. ORDER PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: These are the cross appeals filed by the Department and assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)-1, (in short Ld. CIT(A) ) Ahmedabad, in Appeal No. CIT(A)-1/DCIT Circle 1(1)(1)/157/2011-12 vide order dated 26.09.2018 passed for Assessment Year 2008-09. 2. The Department has taken the following grounds of appeal:- 1) (1) The Ld. CIT(A) has erred In law and on facts in restricting the addition made on account of disallowance of capitalisation of repairs and maintenance expenditure in respect of Plant Machinery from Rs. 16,32,65,319/- to Rs. 14,82,65,61J9/- 2)The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 12,56,27,620/- made on account of loss accrued on foreign exchange derivatives entered into by the Appellant for the purpose of hedgi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of hearing of the appeal. 4. We shall first take up the Department s appeal and the cross appeal filed by the assessee, wherever applicable. Ground No.1 of Department s appeal and Ground No. 1 of assessee s appeal. 5. The brief facts in relation to this ground of appeal are that the assessee had incurred expenditure of Rs. 37.50 crores on account of machinery repairs and debited the same to the Profit Loss Account. Broadly speaking, the aforesaid expenditure comprised of plant repairs and maintenance (Rs. 16.33 crores) and machinery repairs consumption of spares (Rs. 21.10 crores). The Assessing Officer held that the entire expenditure of Rs. 37.50 crores resulted in complete makeover, which gives an enduring advantage to the assessee. Accordingly, the expenditure does not amount to current repairs and the Assessing Officer should have been capitalized. He further observed that payment of Rs. 1.5 cores made to NUOVO PIGNONE cannot be treated as revenue expenditure, since it was for renovation purposes. The Assessing Officer further contended that the assessee failed to produce bills and supporting vouchers in support of the claim and disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 crores as against the figure of Rs. 37.44 crores during the impugned assessment year. He further submitted that in the Tax Audit Report, the auditors have also not qualified the expenses as capital expenses. He further submitted that the party wise details of repairs and maintenance expenses have been furnished from Page 114-138 of Paper Book and on perusal of the same, it can be seen that most of the expenses are below Rs. 25,000/-. He further submitted that the Department in the remand report has itself admitted that the expenses for repairs and maintenance are revenue in nature. He further submitted that, on comparison of plant repairs and maintenance as a percentage of Gross Block of Plant and Machinery is 2.48% during the impugned assessment year, as compared to 2.63% for A.Y. 2006-07 and 2.62% for A.Y. 2007-08. Accordingly, in percentage terms there has been a decline from the past years and even otherwise, relatively machinery repairs constitutes only a small percentage of Gross Block of Plant and Machinery. Accordingly, Ld. CIT(Appeals) has not erred in facts and in law in holding that the expenditure of Rs. 21.10 crores is revenue in nature. 8. We have heard the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ground of appeal are that the assessee entered into contracts to convert its export realization in Euro into USD to pay for its imports in USD. On this basis, it calculated notional gain / loss of Rs. 12.56 crores. During the course of assessment, the Assessing Officer held that losses of foreign exchange derivatives on outstanding contracts are notional and contingent in nature and cannot be allowed as per Instruction No. 2/2020 issued by CBDT on 23.03.2010. 11. In appeal, CIT(Appeals) deleted the addition following Ahmedabad ITAT decision in the case Adani Enterprises Ltd. (55 taxmann.com 375) and Heavy Metals and Tubes Ltd. in ITA No. 1951/Ahd/2011 vide order dated 30.06.2014. The Ld. CIT(A) further held that CBDT Circular No. 3/2010 relied upon by the Assessing Officer had been issued at the time of filing of the return of income by the assessee and therefore, the said Circular cannot be made applicable for impugned A.Y. 2008-09. 12. The Department is in appeal before us against the aforesaid relief. Before us, at the outset, the Counsel for the assessee submitted that the aforesaid issue is covered in favour of the assessee in assessee s own case for A.Y. 2009-10, A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of Rs. 3.78 crores. During the course of assessment, the Assessing Officer held that the expenditure incurred on projects, the completion of which is spread over a number of years, which cannot be treated as revenue and should have been capitalized. The Assessing Officer observed that the assessee has followed percentage completion method and has not capitalized the expenditure. The Assessing Officer held that the assessee has only claimed the expenses on an estimated basis on percentage of completion of project and therefore, the said expenses were required to be capitalized since the assessee is following project completion method. Accordingly, the Assessing Officer held that the expenditure of Rs. 2,02,44,443/- is not allowable under Section 37 of the Act, being capital in nature. 16. In appeal, Ld. CIT(Appeals) allowed the appeal of the assessee on the ground that Firstly, that the assessee has offered the income from projects, which has been accepted by the Assessing Officer as taxable and therefore, the corresponding expenditure cannot be disallowed by the Assessing Officer, Secondly, this method of accounting has been regularly followed by the assessee and Thirdly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture, no disallowance under Section 14A r.w.r. 8D can be made. Accordingly, the Ld. CIT(Appeals) restricted the disallowance under Rule 8D(2)(iii) to the amount of exempt dividend income of Rs. 16,86,651/- by following the ITAT Ahmedabad decision in the case of Ashwin Kantilal Rawal vs. ITO in ITA No. 314/Ahd/2016 vide order dated 23.04.2018 and on the case of Ausom International Pvt. Ltd. in ITA No. 2614/Ahd/2012 dated 06.04.2016. 21. Before us, the Ld. D.R. relied upon the observations made by the Assessing Officer in the assessment year. Before us, the Counsel for the assessee has fairly conceded that the disallowance may be restricted to the amount of exempt income earned by the assessee during the impugned year under consideration. It is a well-settled law on the subject that no disallowance can be made under section 14A in case the assessee has not earned any exempt income/ the disallowance has to be restricted to the amount of exempt income. The Hon'ble Supreme Court in the case of State Bank of Patiala [2018] 99 taxmann.com 286 (SC) held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition made under section 14A of the Act to the amount of exempt income earned by the assessee. 23. In the result, Ground No. 4 of the Department s appeal and Ground No. 2 of the assessee's appeal are dismissed. Ground No. 5 of Department s appeal:- CIT(Appeals) erred in restricting addition from Rs. 3,60,59,592/- to Rs. 16,86,651/- made under Section 115JB of the Act. 24. The brief facts in relation to this ground of appeal are that the Assessing Officer has disallowed the expenditure computed under Section 14A while calculating book profit under Section 115JB. In the assessment order, there is no discussion on this issue and the Assessing Officer has reduced the loss under Section 115JB to the extent of 14A disallowance. There is no finding on this issue in the order passed by Ld. CIT(Appeals). However, it is noted that the book profit as per return of income is a loss. In our view, it is a well settled principle that the amounts disallowed under Section 14A r.w.r. 8D cannot be added to net profit while computing books profits under Section 115JB of the Act. Recently, the Supreme Court of India in the case of Atria Power Corporation Ltd. [2022] 142 taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2014) 43 taxmann.com 55 has held as under:- Section 41(1) of the Income-Tax Act, 1961 - Remission or cessation of trading liability (Cessation of liability) - Assessment Year 2007-08 - in return of income for Assessment Year 2007-08, assessee had shown a certain amount by way of his debts. He supplied details of 27 different creditors. Assessing Officer undertook exercise to verify records of so called creditors and found that creditors had no dealing with assessee. Assessing Officer further having found that debts were outstanding since several years applied section 41(1) and added above amount in income of assessee as deemed income. There was nothing on record to suggest that there was remission or cessation of liability that too during previous year relevant to Assessment Year 2007-08. Whether in peculiar facts of case amount in question could not be added back in income of assessee as deemed income under section 41(1). Held, yes (para 8) (in favour of assessee) . Further, Hon'ble Gujarat High Court in the case of CIT v/s. Nitin S. Garg 208 taxman 16 has also held as under: Section 41(1) of the Income-Tax Act, 1961 - Remission or cessation of trading liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of Limitation Act, 1963, the liability of the assessee company to pay debt ceases to exist after three years. Accordingly, the Ld. D.R. placed reliance on the observations made by the Assessing Officer in the assessment order. 28. We observe that a perusal of Paper Book shows that the aforesaid debts have been repaid back by the assessee in the subsequent years. Further, it is also observed that this issue has been decided in favour of the assessee by ITAT, Ahmedabad in assessee s own case for A.Ys. 2009-10, 2010-11, 2011-12 vide order dated 30.09.2021 in ITA no. 249/Ahd/ 2016 09 others. While allowing the assessee s appeal the ITAT made the following observations: 20. During assessment, the Assessing Officer noticed that assessee has shown sundry creditors of Rs. 506.16 crores. On perusal of the detail filed, the Assessing Officer noticed that assessee has shown sundry creditors in respect of six parties as on 31st March, 2009, 31st March, 2010, 31st March, 2011, 28th Feb, 2015 to the amount of Rs. 14,06,339/-. The Assessing Officer asked the assessee that why this liability should not be presumed to be ceased in view of the fact that till date the amount due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deduct TDS since the services have not been rendered in India and the income in the hands of non-resident agents cannot be considered to have been received or deemed to have been received in India. Further, with respect to recruitment expenses, the Ld. CIT(A) held that since the same are towards reimbursement of travelling expenses of the person who were called for interview by the assessee, there was no requirement to deduct TDS on the aforesaid payments. The Department is in appeal before us against the aforesaid relief granted by Ld. CIT(Appeals). 32. We observe that with respect to payments towards recruitment charges of Rs. 5,17,301/-, similar issue has been decided in favour of the assessee, in assessee s own case by ITAT Ahmedabad for A.Ys. 2009-10, 2010-11, 2011-12 vide order dated 30.09.2021 in ITA no. 249/Ahd/ 2016 09 others. It would useful to reproduce the relevant extracts of the ruling for ready reference:- 51. During assessment, the Assessing Officer observed that assessee has made payment of Rs. 1,14,741/- as recruitment expenses to Perfect Connection Ltd. without deducting tax on the aforesaid payment. These expenses was disallowed as per provision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services rendered outside of India and related to earning of income outside of India by the assessee cannot be subject to TDS under the Act. Accordingly, looking into facts of the case, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in deleting the aforesaid addition. 34. In the result, Ground No. 7 of the Department s appeal is dismissed. 35 . Now we shall discuss the assessee s grounds of appeal. 36. Ground No. 1 2 of the assessee have been discussed in the earlier parts of the order and hence the same are not been reproduced again. Ground No. 3 of the assessee s appeal:- CIT(Appeals) erred in confirming disallowance of Rs. 23,50,843/- made by the Assessing Officer under Section 92CA of the Act. 37. The brief facts in relation to this ground of appeal are that the assessee had granted loans to various Associated Enterprises and assessee had calculated arms length interest of LIBOR plus 2.5% i.e. 7.69% in USD terms and notional interest income was offered to tax. However, this benchmarking was not accepted by the Transfer Pricing Officer (TPO) on the ground that Guarantees fees was not considered while determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Appellant that it is charging interest at substantially higher rate cannot be accepted. It is observed that TPO was correct in adopting interest rate to be charged from AEs at 9.41% based upon LIBIOR + 0.5% margin plus 3.75% risk rate. The method adopted by TPO is based upon evidences whereas Appellant has not brought any comparable evidence for rate of interest considered by it. Considering these facts, addition made by TPO for Rs. 23,50,843/- is confirmed. In the result, this ground of appeal is dismissed. 39. The assessee is in appeal before us against the aforesaid addition confirmed by the Ld. CIT(Appeals). Before us the counsel for the assessee submitted that in various decisions, it has been held in various judicial precedents that upward adjustment should be calculated at LIBOR without any mark-up. Accordingly, the Assessing Officer may be directed to restrict the notional addition at LIBOR plus mark-up of 2.5% as done by the assessee in the return of income. The second contention of the counsel for the assessee is that the risk related mark-up of 3.72% computed by the Assessing Officer is nearly 72% of LIBOR and hence it is exorbitant and the 2.5% rate adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view, is quite excessive. Accordingly, looking into the instant facts of the instant case, we are of the considered view that the assessee is justified in computing the ALP at 7.69% (i.e. at LIBOR plus 2.5%) and the appeal of the assessee is allowed with respect to this Ground of Appeal. 42. In the result, Ground Number 3 of the assessee s appeal is allowed. Ground No. 4 of the assessee s appeal relates to disallowance of Rs. 25,12,910/- in respect of late payment of employees contribution to PF ESI. 43. We observe that the position on this issue has now been unambiguously clarified by the Hon'ble Supreme Court with respect to all assessment years prior to AY 2021-22in the case of Checkmate Services (P.) Ltd. [2022] 143 taxmann.com 178 (SC) wherein the Supreme Court held that for assessment years prior to AY 2021-22, non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was held in trust by assessee-employer as per section 2(24)(x), thus, said clause would not absolve assessee-employer from its liability to deposit employee's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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