9911796707
TMI Blog2023 (11) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... before us to persuade us to depart from the view taken by the Tribunal in the case of the Assessee for the preceding assessment years on this issue.Thus we do not find any infirmity in the order passed by the CIT(A).Ground No. I II raised by the Assessee are dismissed. TP Adjustment - interest on loan to Associated Enterprises - Assessee voluntary made an adjustment in the computation of total income by computing interest at the rate of 1.53% (i.e. Average US LIBOR + 1%) in case of interest free USD loan to Aditya Birla Minacs Philippines and at the rate of 5.50% in case of interest free CAD loan to AVTL, Canada - HELD THAT:- As decided in assessee own case has accepted LIBOR plus 1% as arm s length rate of interest. Thus keeping in view the above decisions of the Tribunal in the case of the Assessee, which continue to hold the field, we do not find any merit in the contention advanced by the Assessee that no transfer pricing adjustment was warranted. The decision of CIT(A) to hold LIBOR + 1% as arm s length rate of interest in respect of loan for AEs is in line with the above decisions of the Tribunal in the case of the Assessee. Disallowance of claim of proportionate premium pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee. We note that the appeal preferred by the Assessee against the above order of the Tribunal on the issue of deletion of disallowance under Section 36(1)(iii) of the Act has been dismissed by the Hon ble Bombay High Court [ 2019 (10) TMI 760 - BOMBAY HIGH COURT] . Further, the Special Leave Petition [ 2020 (10) TMI 1213 - SC ORDER] preferred by the Revenue against the aforesaid order of the Hon ble Bombay High Court has also been dismissed on the ground of delay. Thus no infirmity in the order passed by the CIT(A) in allowing the claim for deduction. Disallowance of Employee Stock Option Scheme (ESOP) expenses - Allowable revenue expenses u/s 37(1) or not? - HELD THAT:- In view of the Special Bench of the Tribunal in Biocon Ltd. [ 2013 (8) TMI 629 - ITAT BANGALORE] allowed deduction of ESOP expenses under Section 37(1) of the Act stands confirmed by the Hon ble High Court [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT] we do not find any infirmity in the order passed by the CIT(A) allowing the claim for deduction of ESOP Expenses under Section 37(1). Mark to Market loss - loss pertaining to forward contracts treated as notional loss - Assessee had claimed deduction for foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oetze India Ltd. Vs. CIT [ 2006 (3) TMI 75 - SUPREME COURT] it was, inter alia, held that the first appellate authorities was entitled to entertain and adjudicate even a new claim raised by the Assessee for the first time before the first appellate authority. Accordingly, we do not find any infirmity in the order passed by the CIT(A). X X X X Extracts X X X X X X X X Extracts X X X X ..... er international benchmarking rates which is used as the international standard for lending and borrowing of funds and considering the direct commercial interest of the Company no addition was justifiable on loan given to its AE 3. The Appellant prays that the AO/TPO be directed to delete the addition on account of notional interest on loans advanced to the AES or be directed to reduce the notional interest addition appropriately GROUND NO. IV: DISALLOWANCE OF Rs. 4.65,200 U/S 35D OF THE ACT IN RESPECT OF STAMPING CHARGES PAID ON FURTHER ISSUE OF SHARES: 1. On the facts and the circumstances of the case and in law, the Ld CIT (A) erred in upholding the disallowance of the claim u's 35D amounting to Rs. 4,65,200/- on the alleged ground that the expenditure is incurred for increase in authorized capital and therefore the entire expenditure is capital in nature 2 The Appellant prays that the AO be directed to delete the aforesaid addition amounting to Rs 4,65,200/-. GROUND NO. V: DISALLOWANCE OF PREMIUM PAID ARISING ON ACCOUNT OF REPAYMENT OF OPTIONALLY CONVERTIBLE DEBENTURES ISSUED TO ADITYA BIRLA NUVO LIMITED AND THEREBY MAKING AN ADDITION OF INCOME OF Rs. 14,37,11,341 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional in nature as per SEBI guidelines and are not allowed u/s. 37(1) of the I.T.Act. 3(iii) On the facts and in law, the Ld.CIT(A) erred in not appreciating the fact that the facts of the instant case and Biocon Ltd. are different and the decision of the Special Bench of Bangalore in the case of Biocon Ltd. is not applicable in the instant case. 4) The appellant prays that the order of the CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer be restored. 5) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. The relevant facts in brief are that the Assessee is a company engaged in the business of Information Technology enabled Services and provides call centre and BPO Services. For the Assessment Year 2011-12, the Assessee filed return of income on 28/11/2011 declaring 'Nil income and claiming carry forward of current year losses of INR 27,00,41,977/-. 3.1. The case of the Assessee was selected for regular scrutiny assessment. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into international transactions with Associated Enterprises (AEs) and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) also accepted Assessee's claim for deduction of INR 31,40,45,133/- under Section 36(1)(iii) of the Act and deleted the disallowance of interest and other expenses related to acquisition of share of foreign subsidiary made by the Assessing Officer. As regards transfer pricing adjustment on account of interest on loans to AEs, the CIT(A) directed the Assessing Officer to re-compute the transfer pricing adjustment by adopting rate of LIBOR + 1%. As regards transfer pricing addition relating to guarantee fee, the CIT(A) directed the Assessing Officer to re-compute the transfer pricing addition by taking guarantee commission fee rate of 0.5% as against 2.5% adopted by the Assessing Officer/TPO. However, the CIT(A) declined to grant any relief in relation to the disallowance of INR 4,65,200/- made under Section 35D of the Act and also confirmed the rejection of the additional claim for deduction of INR 14,37,11,341/- in respect of premium paid on repayment of optionally convertible debentures specified in paragraph 3.2 above. 3.4. Being aggrieved, the Assessee preferred appeal before the Tribunal on the grounds reproduced in paragraph 2.2 above. Ground No. I, II & III pertain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.5 million details of which are as under: Lender : DBS Bank, Singapore Borrower : AVTL, Canada (with Assessee as Guarantor) Period : 5 years (with 03/11/2006 as start date for Guarantee by the Assessee) 4.5. During the assessment proceedings, the Assessee took a stand that providing corporate guarantee to AE does not constitute an international transaction under Section 92B of the Act. However, the Assessing Officer/TPO rejected the aforesaid contention and made transfer pricing addition of INR 2,73,48,125/- by taking arm's length guarantee fee rate of 2.5%. 4.6. In appeal, the CIT(A) agreed with the Assessing Officer/TPO and concluded that providing corporate guarantee is an international transaction. However, the CIT(A) granted relief to the Assessee by giving directions to determining arm's length guarantee fee at the rate of 0.5% as against 2.5% determined by TPO/Assessing Officer. 4.7. Being aggrieved by the order passed by the CIT(A), the Assessee is in appeal before the Tribunal claiming that arm's length guarantee fee rate of 0.5% is on a higher side on the basis of report of independent chartered accountant wherein the aforesaid rate has been computed at 0.263 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds Nos: 1, 2 and 3 of Assessee's Appeal No. 4276/M/2015 for A.Y. 2009-10 are allowed and ground No. 1 of Revenue's Appeal No. 4790/M/2015 for A.Y. 2009-10 is dismissed." 4.9. Thus, for the Assessment Year 2008-09 and 2009-10 the Tribunal had, following the decision of the Tribunal in the case of the Assessee for the Assessment Year 2007-08 [ITA No.7033/Mum/2012, dated 25/03/2015], agreed with the CIT(A) that providing corporate guarantee to an AE constitutes an international transaction and had accepted the guarantee fee rate of 0.5% determined by the CIT(A) as the arm's length rate while rejecting the rate proposed by the Assessee. There is no change in the facts and circumstances of the case. Nothing has been placed before us to persuade us to depart from the view taken by the Tribunal in the case of the Assessee for the preceding assessment years on this issue. 4.10. In view of the above, we do not find any infirmity in the order passed by the CIT(A). Therefore, respectfully following the above decisions of the Tribunal in the case of the Assessee for the Assessment Years 2007-08, 2008-09 and 2009-10, Ground No. I & II raised by the Assessee are dismissed. Ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the present case. However, we are not inclined to accept the same. While deciding this issue, the CIT(A) has concluded as under: "I have gone through the submissions of the Appellant and the order of the TPO. I find that Hon'ble ITAT in the Appellant's own case in AY 2007-08, AY 2008-09 & AY 2009-10, consistently decided LIBOR @ 1% to be Arm's length price for determining the Interest on loan to its AES. Hence, following the Rule of Consistency and in view of Judicial discipline, I consider it proper and appropriate to direct the AO / TPO to determine the Arm's Length Price of Interest on loan to the AES LIBOR +1%. Accordingly, the Appellant's this ground of Appeal is Partly Allowed." 5.7. We have perused the orders passed by the Tribunal in the case of the Assessee for the Assessment Year 2007-08 [ITA No. 7033 & 7142/Mum/2012, dated 25/03/2015, and ITA No. 7033 (recalled matter), 16/03/2016] and common order, dated 25/08/2016, passed in ITA No. 610 & 620/Mum/2013 and ITA No. 4276 & 4790/Mum/2015 pertaining to Assessment Years 2008-09 and 2009-10 by following the decision dated 16/03/2016, passed by the Tribunal. Vide order dated 16/03/2016, Co-ordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st rates, payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest". 8. Thus, the LIBOR BPS point would be the correct method for benchmarking the arm's length price in case of interest is paid in foreign currency. Since assessee's charging interest rate at LIBOR +1% which is based on an internal CUP, therefore, such a benchmarking gives the most appropriate result of arm's length price because internal CUP is always preferable to external CUP, which gives far more accuracy of ALP. Accordingly, we accept the Ld. Counsel's contention on this score and direct the AO to accept the interest rate charged at LIBOR 1% as on arm's length price. Accordingly, ground no. 2 is treated as allowed." 5.8. Given the admitted position that there is no change in the facts and circumstances of the case in the assessment year before us, and keeping in view the above decisions of the Tribunal in the case of the Assessee, which continue to hold the field, we do not find any merit in the contention advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed deduction for INR 54,59,43,438/- being premium pertaining to debentures proceeds utilised in business for the entire period of Assessment Year 2010-11 to Assessment Year 2014-15. However, the Assessing Officer rejected the plea of full claim and allowed only pro-rata claim for Assessment Year 2014-15 of INR 12,15,52,414 vide order, dated 21/12/2017, passed under Section 143(3) of the Act. 7.4. Meanwhile, vide letter dated 27/02/2015, the Assessee also filed claim for deduction of INR 14,37,11,341/- for the proportionate premium paid on redemption of Debentures under Section 37(1) of the Act during the assessment proceedings for the Assessment Year 2011-12 which was rejected by the Assessing Officer vide Assessment Order, dated 07/05/2015, passed under Section 143(3) read with Section 144C(3) of the Act. The Assessing Officer rejected the aforesaid claim, inter alia, on the ground that the same was expenses claimed were capital in nature. 7.5. The CIT(A) also decline to grant any relief on this issue and did not allow the claim for deduction of INR 14,37,11,341/- pertaining to the proportionate premium paid on redemption of Debentures. 7.6. Being aggrieved, the Assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is held that there is no distinction between 'Premium' and 'Discount' and both of them are entitled to be spread over the period of debentures. In holding so, the Hon'ble High Court relied upon judgment of the Hon'ble Calcutta High Court in the case of National Engg. Industries Ltd. v. CIT The courts have held that premium on debentures is allowable over the period of debentures. Accordingly, the Assessee has made a claimed deduction for the proportionate amount only for the relevant assessment year. (e) Premium or interest is indeed recompense for the use of funds. Commercially, when the terms of CCD were converted to OCDs and the OCDs were ultimately redeemed, such recompense was worked out commercially at the compounded rate of approx. 10% p.a. (approx.). This gave an overall premium of 52% on face value. If, however, the rate of return is calculated from the date of conversion to the date of redemption (i.e from 28/02/2014 to 24/03/2014), then the recompense works out to 624% p.a. If it is presumed that the premium runs from the date of conversion, then such presumption would be de-hors of commercial realities as a return of 624% p.a by the issuer co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the relevant assessment year. The amount claimed as deduction by the Assessee did not enter the books of account of the Assessee for the relevant previous year either at the time of closure of books of account or at the time of filing return of income as at that point in time the issue payment of premium of redemption of shares was not there. Therefore, deduction for premium paid on redemption of debentures cannot be allowed to the Assessee as a deduction during the relevant previous year. 7.10. We have given thoughtful consideration to the rival submission. It is admitted position that the Assessee had issued CCDs of INR 250 Crores to Barclays. Since the CCDs were freely transferable the same were eventually purchased by ABNL, the parent company of the Assessee, on 07/02/2014 from the then holders of CCDs namely L&T Fincorp Ltd., L&T Infrastructure Finance Co. Ltd. and Tata Capital Financial Services Ltd. On 28/02/2014, as per mutual agreement between ABNL and the Assessee, CCDs were converted from OCDs. Since, ABNL did not opt for conversion, the OCDs were redeemed on 26/03/2014 at a premium of 130 Crore. The issue raised for consideration before us is whether the Assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m as interest during the relevant previous year, in our view, does not arise. 7.14. It has been contended on behalf of the Appellant that premium on redemption of debentures is recompense for the use of funds. It is a matter of the commercial arrangement whether the lender opts for recompense in the form of allotment of equity shares in case of CCDs or premium on redemption in case of OCDs. For the relevant previous year, the borrower had opted for recompense in the form of allotment of equity shares. Therefore, deduction for premium on redemption claimed by the Assessee cannot be allowed. 7.15. It was submitted on behalf of the Assessee that premium, which is recompense for the use of funds, was worked out commercially at the compounded rate of approx. 10% p.a. giving an overall premium of 52% on face value. If, however, the rate of return is calculated from the date of conversion to the date of redemption (i.e from 28/02/2014 to 24/03/2014), then the recompense works out to 624% p.a. which would be de-hors of commercial realities. In our view that the commercial effect of financial arrangement between the parties cannot form the basis of allowance of claim made by the Assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NR 14,37,11,341/- in respect of proportionate premium on redemption of OCDs made by the Assessee during the assessment proceedings. Accordingly, Ground No. V raised by the Assessee is dismissed. Appeal by Revenue (ITA No. 5280/Mum/2017, AY 2011-12) 8. We would now take up grounds raised by the Revenue in the cross appeal. Ground No. 1 9. Ground No. 1 raised by the Revenue is directed against the order of CIT(A) determining the guarantee fee rate at 0.5% as against 2.5% determined by the TPO/Assessing Officer. 9.1. While dismissing Ground No. I & II raised by the Assessee in its appeal, we have noted that for the Assessment Year 2008-09 and 2009-10 the Tribunal had accepted the rate of 0.5% determined by the CIT(A) as the arm's length rate for corporate guarantee fee. The Revenue had, being aggrieved, preferred appeal before the Hon'ble Bombay High Court against the decisions of the Tribunal in the case of the Assessee for the Assessment Year 2008-09 and 2009-10. We note that the Hon'ble Bombay High Court has, while dismissing the appeals preferred by the Revenue in the case of the Assessee for the Assessment Year 2008-09 and 2009-10 [Income Tax Appeal No. 778 & 867 of 2017, da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us not entertained." 9.2. On perusal of above, we find that the Hon'ble Bombay High Court had relied upon its earlier judgment, dated 04/09/2018, passed in the case of the Assessee in ITA No. 303 of 2016 pertaining to the Assessment Year 2007-08 wherein relying upon the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Income Tax, Mumbai Vs M/s Everest Kento Cylinders Ltd. : (2015) 378 ITR 57 (Bom.), the Hon'ble Bombay High Court had declined to frame substantial question of law in appeal preferred by the Revenue. 9.3. The above judgment of the Hon'ble Bombay High Court for Assessment Year 2007-08 was followed by the Hon'ble Bombay High Court in appeal preferred by the Revenue for the Assessment Years 2008-09 and 2009-10 after taking note of the fact that there was no change in law or on facts. The position continues to be same for the assessment year before us. There is nothing on record to persuade us to take a view different from the view taken by the Tribunal in the preceding assessment years which has been confirmed by the Hon'ble Bombay High Court. Accordingly, Ground No. 1 raised by the Revenue is dismissed. Ground No. 2 10. Ground No. 2 raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55, Mumbai, who has deleted the addition made by the Assessing Officer, therefore not being satisfied from the order of the CIT(A), the Revenue is in further appeal before us on this issue. 28. The issue involved in this case is that the assessee company has incurred interest expenses of Rs. 18,35,14,582/- and exchange fluctuation loss of Rs. 1,24,01,148/- in connection with the loans taken for DBS Bank for acquisition of Minacs Canada, which was claimed as allowable business expenses by the assessee company. The Ld. Assessing Officer, has held that assessee company is not earning any income under the head business or profession from the said investment and hence, the interest expenses cannot be treated as business expenditure. Therefore, the Assessing Officer has disallowed the interest expenses along with exchange fluctuation loss. Aggrieved from the order of the Assessing Officer, the assessee company has filed an appeal before the CIT (A)- 15, for A.Y. 2008-09, who has confirmed the action of the Assessing officer. Not being satisfied from the order of the Ld. CIT (A), the assessee company is in further appeal before us for A.Y. 2008-09 and for A.Y. 2009-10 the Revenue is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed the interest expenditure incurred by the assessee company. The Ld. AR for the assessee company has cited before us the following judgments wherein it has been held that interest expenditure should not be disallowed in relation to loan given to subsidiaries based on commercial expediency: 1. Bombay steam Navigation Co (P) Ltd. v. CIT [1965] 56 ITR 52 (SC) 2. India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) 3. S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) 31. Further the Ld. AR for the assessee company has also relied on the following judgments wherein it has been held that interest paid on borrowed funds for the purpose of acquiring controlling interest in the company is allowable expenditure:" 1. CIT. Shrishti Securities [2010] 321 ITR 498/2009] 183 Taxman 159 (Bom.) 2 CIT v Rajeev Lochan Kanoria [1994] 208 ITR 616/1995] 80 Taxman 572 (Cal) Therefore, based on the above cited facts and circumstances and position in case law, the interest expenditure incurred by the assessee is out of commercial exigency of the business and hence should be allowed as business expenditure under section 36 (1) (iii) of the Act, and we accordingly direct the Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the same are not acceptable in view of the judgment of the Hon'ble ITAT Delhi in the case of Ranboxy Laboratories Ltd. vs. Addl. CIT, 124 TT3 771 (2009), wherein it was held that "what is loss to the assessee is by way of short receipt of share premium and not by way of any expenditure or incurring of any liability. Receipt of share premium is not taxable and hence, any short receipt of such premium would only be a notional loss and not actual loss. SEBI guidelines requiring the assessee to account for short receipt of share premium as employees compensation expenses are relevant only for the purpose of accounting and are not conclusive for the purpose of allowing the same expenditure." 9.3 In view of the above, the notional expenses as per SEBI guidelines are not allowable under section 37(1) of the Act and hence the same is disallowed. Further, the ruling of Madras High Court in case of PVP Ventures Ltd. cannot be considered since the matter is presently subjudice. Hence the ESOP expenses of Rs. 4,50,38,317/- incurred by the assessee company are hereby disallowed. However, no addition on this account is being made to the total income of the assessee sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraphs 9.3.1 to 9.3.6 of the order passed by the tribunal and reliance has been placed on decision of the Supreme Court in Bharat Earth Movers v. CIT [2000] 112 Taxman 61/245 ITR 428 (SC), Rotork Controls India (P.) Ltd v. CIT [2009]180 Taxman 422/314 ITR 62 (SC). It is also argued that for the purposes of section 37(1) of the Act, it is sufficient if the expenditure has been incurred and therefore, issuance of shares at a discount were the assessee absorbs the difference between price at which it is issued and the market value of the shares would also be an expenditure incurred for the purpose of section 37 of the Act. Our attention has been invited to the findings recorded by the tribunal in paragraphs 9.2.7 to 9.2.8 of the tribunal and reliance has been placed on decisions in 'Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225 ITR 802 (SC), CIT v. Woodward Governor (India) (P.) Ltd., [2009] 179 Taxman 326/312 ITR 254 (SC). It is also urged that discount on issue of ESOPs is only a form of compensation paid to the employee and if not a short capital receipt. It is also urged that deduction of discount on ESOP over the vesting period is in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 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". 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... REATING THE CORPORATE GUARANTEE GIVEN AS AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE ACT. 1 On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in regarding the guarantee given by Appellant to its AE as an international transaction' under section 92B of the Act and in making an addition on account of notional guarantee fees. 2 The Ld CIT(A) failed to appreciate and ought to have held that (i) The ultimate beneficiary of the loan was the Appellant itself while the AE, a company registered in Canada, AV Transworks Limited ('AVTL') was merely a route for availing the funds and investing in Canada, in pursuit of the Appellant's own objective of business expansion, (ii) An international transaction would arise only when the foreign subsidiary defaults in making the payment of loan to the bank. Therefore, section 92(1) of the Act would, primarily, not be applicable at all, till the guarantee is invoked. (iii) Without prejudice to above, the AO/TPO and the Hon'ble CIT(A) erred in not accepting the contention of the Appellant that in no case the amount of guarantee fee commission shall exceed 0.236% as per the Guarantee Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration 2 On the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in upholding the addition on the ground that the transaction details were not verified by the AO since the Appellant had not filed the details. 3 The Appellant prays that the AO/TPO be directed to delete the aforesaid addition amounting to Rs 14,37,11,341/ GROUND 4: TDS Credit On the facts and circumstances of the case and in law, the AO, erred in granting the full credit of TDS. The AO may be directed to allow full credit as claimed by the Appellant in return of Income GROUND 5: Penalty Proceedings On the facts and circumstances of the case and in law, the AO erred in initiating the penalty proceedings. GROUND 6: General The Appellant craves leave to add, alter, amend, vary, omit substitute or withdraw the ground(s) of appeal at the time or before the hearing of this appeal. 12.3. The Revenue has raised the following grounds of appeal in ITA No. 5940/Mum/2017: "1 Whether in law and on the facts of the instant case, was the CIT(A) justified in directing the AO/TPO to adopt 0.5% as the ALP of the guarantee commission charges provided by the assessee company without apprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Year 2011-12. Therefore, our findings and adjudication in respect of grounds of appeal raised by the Assessee/Revenue for the Assessment Year 2011-12 shall apply mutatis mutandis to the corresponding grounds raised in the cross-appeals for the Assessment Year 2012-13. Appeal by Assessee (ITA No. 5764/Mum/2017, AY 2012-13) 14. Keeping in view paragraph 13 above, we would first take grounds raised by the Assessee in the appeal. Ground No. 1 15. Ground No. 1 raised by the Assessee is directed against the order of the CIT(A) confirming the order passed by the Assessing Officer holding that the providing corporate guarantee to AE constitutes an international transaction under Section 92B of the Act. On a without prejudice basis, the Assessee has further contended that even if it is assumed that providing corporate guarantee to AE constitutes an international transaction, the CIT(A) erred in determining guarantee fee rate at 0.5% as the same could not have been more than 0.263% as determined by the independent chartered accountant in the report furnished during the assessment proceedings. 15.1. Ground No. 1 raised in appeal for the Assessment Year 2012-13 by the Assessee is ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ront the Assessee and seek explanation before denying credit of tax deducted at source. In terms of the aforesaid, Ground No. 4 raised by the Assessee is allowed for statistical purposes. Ground No. 5 19. Ground No. 5 raised by the Assessee is directed against the initiating the penalty proceedings. Penalty proceedings are separate and distinct from the assessment proceedings. In any case, the ground raised by the Assessee is premature, and is, therefore, dismissed. Ground No. 6 20. Ground No. 6, being general in nature, does not required adjudication and is, therefore, dismissed. Appeal by Revenue (ITA No. 5940/Mum/2017, AY 2012-13) 21. We would now take grounds raised by the Revenue in the appeal. Ground No. 1 22. Ground No. 1 raised by the Revenue is directed against the order of CIT(A) adopting he arm's length rate of guarantee fee at the rate of 05% as against 2.5% adopted by the TPO/Assessing Officer. 22.1. Ground No.1 raised by the Revenue in appeal for the Assessment Year 2012-13 is identical to Ground No. 1 raised in appeal by the Revenue for the Assessment Year 2011-12 which has been dismissed hereinabove. Accordingly, in view of our finding/adjudication in parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of DCIT Vs. Bank of Bahrain & Kuwait : 41 SOT 290 (Mumbai Tribunal) (SB) and the decision of Mumbai Bench of the Tribunal in the case of ACIT-16(3) Vs. M/s Venus Jewel [ITA Nos. 7328 & 7239/Mum/2013, dated 31/07/2015]. 25.3. Being aggrieved by the above relief granted by the CIT(A), the Revenue is now in appeal before us on this issue. 25.4. Both the sides reiterated the stands taken before the authorities below. The Ld. Departmental Representative placed reliance on paragraph 8.4 to 8.11 of the Assessment Order. Per contra, the Ld. Authorised Representative for the Assessee supported the order passed by the CIT(A) and, inter alia, submitted that the Assessing Officer has disallowed the loss claimed by the Assessee solely on the ground that it is 'notional' in nature by placing reliance upon CBDT Instruction No. 03/2010, dated 23/03/2010. The Assessing Officer has not disputed the fact that the foreign exchange difference is on account of hedging of exposure to forex losses on account of exports, and in the absence of the Assessing Officer even alleging that the loss is speculative in nature, the loss cannot be disallowed as a normal business loss. Further, there is no al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he asset continues to be owned by the company. A Marked to Market' loss may be given different accounting treatment by different assessees. Some may reflect such loss as a balance sheet item without making any corresponding adjustment in the Profit and Loss Account. Other may book the loss in the Profit and Loss Account which may result in the reduction of book profit. In cases where no sale or settlement has actually taken place and the loss on Marked to Market basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income. The same should therefore be added back for the purpose of computing the taxable income of an assessee." 25.6. On perusal of paragraph 8.6 of the Assessment Order reproduced hereinabove it becomes clear that the Assessing Officer was of the view that the issue under consideration was decided in favour of the Assessee by the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Income-tax Vs. Badridas Gauridu Pvt. Ltd. : [2003] 261 ITR 256 (Bombay). However, in view of the Instruction No. 3 of 2010, dated 23/03/2010, issued by CBDT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mature, then the derivatives loss has to be treated as a contingent liability and has to be added back to the book profit. He further observed that such a loss cannot be allowed to be set off against the taxable income under the normal provisions of the Act also and accordingly disallowed the same under both the normal provisions of the Act as well as book profits returned under clause (c) of Explanation 1 of section 115JB of the Income-tax Act. 23. Aggrieved, the assessee preferred an appeal before the CIT(A) reiterating the submissions made before the AO. The CIT(A), taking - note of the decision of the Special Bench of the Tribunal in the case of DCIT V s. Bank of Bahrain and Kuwait in ITA No.4404 and 1883/Mum/2004 dated 19/8/2010 reported in [2010] 132 TTJ (Mum) (SB) 505,] [(2010) 41 SOT .290 (Mum) (SB)] held that the 'marked to market loss' debited by the assessee is not a contingent liability but is an 'accrued liability' and is, therefore, allowable as an expense. 24. Aggrieved by the relief given by the CIT (A), the Revenue is in appeal before us. 25. The learned DR placed reliance upon the order of the AO as well as the CBDT Instruction No.3 of 2010 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued the forward contracts on the last day of the accounting period on the basis of rate of foreign exchange prevailing on the date and accounted for the loss or profit as the case may be. The Special Bench has considered the question as to whether the loss was notional or contingent or whether it was accrued loss. After considering the commercial principles of policy of prudence, the Special Bench has held that the loss which is incurred on account of forward contract to sell currency at an agreed price at a future date falling beyond the last date of accounting period is a loss incurred by the assessee on account of the valuation of the contract on the last date of the accounting period and before the date of the maturity of the forward contract and hence is not a contingent liability but an accrued liability and is allowable as an expenditure. We find that the facts of the case before us are similar to the facts of the case before the Special Bench in the case of Bank of Bahrain and Kuwait (cited Supra) and the CIT(A) has only followed the decision of the Special Bench. 28. The learned DR had not been able to bring to our notice any other decision to the contrary. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognized on the same basis. It was then explained that as on the date of the closing of books, the assessee had some of these contacts, remaining to be settled in future by delivery of foreign exchange, and that the assessee had computed the loss, on the basis of foreign exchange rates as at the end of the year, on discharging these obligations. The amount so computed came to Rs 22,15,55,371. It was also explained that the assessee was maintaining its books on mercantile basis, and, therefore, even though the loss had not crystallized inasmuch as delivery was to take place in future and there may be variation in foreign exchange rates at that point of time, the loss was deductible under section 37(1). The assessee had also furnished the details of contracts and corresponding exports and imports obligations. It was also explained that the actual loss was Rs 119.65 crore, and not simply Rs 22.15 as was computed on the 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 thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e gain in the same year under appeal. The Appellant is consistent in making entries in the books in respect of losses as well as gains. Condition No. 5 Whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; The answer is affirmative as the Appellant is following Accounting Standard AS-II issued by the Institute of Chartered Accountants of India. Condition No. 6 Whether- the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. The system adopted by the Appellant is fair and reasonable and is not adopted with a view to reduce the incidence of taxation. In fact the Rule 115 of the Income Tax Rules provides that that all the assessee should; convert their foreign exchange assets into Indian Rupees on the last day 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. Va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock on market price or cost price whichever is less. There is thus, in principle, no difficulty is seeking a deduction in respect of a reasonably anticipated loss, even though it may not have actually fructified, in computation of profits and gains of business. To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income. On the facts of the present case, however, not only anticipated losses have been claimed as deduction but anticipated profits have been offered to tax. The gains have been offered to tax on the basis of assessee's following mandatory accounting standards, and on the basis of same accounting standards losses on forward contracts have been recognized too. The claim of deduction of Rs 22.15 crores represents the difference between total foreign exchange loss of Rs 50.11 crores as at the year end date and foreign exchange gains of Rs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;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. 14. xx xx 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] 16.……….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 accounting year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the details filed by the assessee, the foreign exchange contracts have been entered into for genuinely restricting its bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transactions. These transactions are integral part of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. 10. In view of the above discussions, we uphold the action of the CIT(A) so far as this relief in respect of deleting the disallowance of Rs 22,15,55,371 on account of loss, at the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter. 11. Ground no.1 is thus dismissed." 18. Respectfully following the views so expressed by the co-ordinate bench, we uphold the relief granted by the learned CIT(A) and decline to interfere in the matter. 19. Ground no.2 is thus dismissed." (Emphasis Supplied) 25.8. Further in the case of PCIT Vs. International Gold Company Ltd.: Income Tax Appeal No. 1827 of 2016) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court has held that where an assessee failed to deposit Employees' Contribution towards Provident Fund and Employees' State Insurance within due date prescribed in respective statutes, deduction under Section 36(1)(va) of the Act was not allowable. The non-obstante clause contained in Section 43B of the Act would not apply in the case of employees' contribution held in trust by assessee-employer. Therefore, such assessee-employer would not be absolved from the liability to deposit employees' contribution on or before the due date specified in the respective statutes as a pre-condition for claiming deduction under Section 36(1)(va) of the Act. 26.2. In view of the above, order of CIT(A) is overturned and the disallowance of INR 23,30,594/- made by the Assessing Officer is restored. Ground No. 5 raised by the Revenue is allowed. Assessment Year 2013-14 27. We will now take up appeals preferred by the Revenue for the Assessment Year 2013-14 which arises from the common order, dated 28/06/2019, passed by the CIT(A) whereby the CIT(A) had partly allowed the appeal preferred by the Assessee against the Assessment Order, dated 30/12/2016, for the Assessment Year 2013-14 passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment Year 2011-12 shall apply mutatis mutandis to the corresponding grounds raised in the Revenue in appeal for the Assessment Year 2013-14. 29. Keeping in view paragraph 25 above, the grounds raised by the Revenue in the appeal are taken up hereinafter in seriatim. Ground No. 1 29.1. Ground No. 1 raised by the Revenue is directed against the CIT(A) holding that 'Mark to Market' loss of INR 89,59,018/-. 29.2. Ground No. 1 raised in appeal for the Assessment Year 2013-14 by the Revenue is identical to Ground No. 4 raised in appeal by the Revenue for the Assessment Year 2012-13 which has been dismissed herein above. Accordingly, in view of our finding/adjudication in paragraph 25 to 25.9 above. Ground No. 1 raised by the Revenue is dismissed. Ground No. 2 30. Ground No. 2 raised by the Revenue pertains to 'Mark to Market' losses of INR 4,06,80,762/- pertaining to Assessment Year 2012-13 which was reversed during the Assessment Year 2013-14. 31. During the assessment proceedings, the Assessee had claimed that since deduction for Mark to Market Loss was not allowed during the Assessment Year 2012-13, the reversal of Mark to Market Loss of INR 4,06,80,762/- should not be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are dismissed. Ground No. 5 & 6 33. Ground No. 5 & 6 raised by the Revenue in appeal for the Assessment Year 2013-14 is directed against the order of CIT(A) allowing. deduction for proportionate premium of INR 12,32,40,462/- on redemption of optionally convertible debentures. 33.1. Ground No. 5 raised by the Revenue is in appeal for the Assessment Year 2013-14 deals with identical issue raised by the Assessee in Ground No. V of the appeal for the Assessment Year 2011-12 and Ground No. 3 raised in appeal for the Assessment Year 2012-13. For Assessment Year 2011-12 and 2012-13, the CIT(A) had confirmed the order of the Assessing Officer whereby the Assessing Officer had disallowed deduction for proportionate premium on redemption of optionally convertible debentures, whereas for the Assessment Year 2013-14, the CIT(A) has allowed Assessee's claim for deduction for proportionate premium of INR 12,32,40,462/- on redemption of optionally convertible debentures. While adjudicating Ground No. V and Ground No. 3 in the appeals preferred by the Assessee for the Assessment Year 2011-12 and 2012-13, we have decided this issue against the Assessee and in favour of the Revenue. Admittedly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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