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TMI Blog2024 (7) TMI 1587X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, matter needs to be reconsidered and orders of the lower authorities are set aside and issue of TP adjustment made in this regard for an amount are remitted back to the file of the AO; and the AO shall re-examine the issue. TP Adjustment on corporate guarantee - HELD THAT:- We concur with the TPO's order that this is an international transaction, but upward adjustment is now covered in favour of the assessee by the decision of Redington (India) Ltd. [2020 (12) TMI 516 - MADRAS HIGH COURT] and Everest Kanto Cylinder Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT] therefore, we direct the AO to restrict adjustment @0.5% of the guarantee value. Deduction u/s.35(2AB) - non-approval of the expenditure by the DSIR - HELD THAT:- Assessee has rightly contended that amendment was not applicable, and the prescribed authority was not required to quantify the expenditure and had to only give report in relation to the approval of in-house facility and development facility, and therefore, in the absence of any requirement of law, the AO erred in curtailing the expenditure and consequent weighted deduction claimed by assessee. Therefore, the non-approval of the expenditure by the DSIR doesn't ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards acquisition of capital assets which was disallowed by the AO stating that since such expenditure was towards acquisition of capital assets, it is in the nature of capital expenditure, and therefore, such claim made by the assessee is not allowable - HELD THAT:- We find force in the submission of Ld AR, and note that the assessee's has claimed deduction towards foreign exchange loss on restatement of foreign currency loan (on 31st March) which was undisputedly taken towards acquisition of indigenous assets; and assessee as per AS-11 has rightly shown the same (forex loss) in the P & L A/c; and therefore is allowable as revenue deduction, and we order accordingly. Interest on diverted funds - HELD THAT:- The assessee had profit after tax to the tune of Rs.95 Crs. and his net worth was Rs.694 Crs. and the loan given to the sister concern is only to the tune of Rs.9.06 Crs. Therefore, applying the ratio in the case of CIT (LTU) v. Reliance Industries [2019 (1) TMI 757 - SUPREME COURT] it can be safely presumed that assessee had sufficient own funds, and that advances/loans were given to M/s.SFIL from the interest free funds (own funds) available with the assessee and not fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be @9% from the other two AEs also and accordingly, made an adjustment of Rs.3,52,83,780/- as under: No Loan granted To Amount Rate of Interest Interest Amount (in Rs.) 1 Peiner Umformtechnik GmbH, Germany 346,873,500 9% p.a. 3,12,18,615 2 TVS Peiner Services, Germany 45,168,500 9% p.a. 40,65,165 Total 3,52,83,780 2.2 The DRP has confirmed the action of the TPO. The Ld.AR of the assessee pointed out that Companies to whom assessee gave loan @6% were wholly owned subsidiary of the assesse's/Pioneer Group; and further submitted that the loan advanced to them were for the purpose of business; and since, both the AEs were not in good financial health, considering the commercial expediency, the assessee had advanced loan to them; and also pointed out that even though, interest was charged @6%, the assessee had to eventually waive off the interest and thus, the assessee in fact had advanced the amount interest-free to these subsidiary/AE's. And in this context, the Ld.AR pointed out that the assessee had enough own-money to give interest-free loan to related parties/AE's and therefore, no adjustment was warranted; and submitted that similar issue had cropped ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are set aside and issue of TP adjustment made in this regard for an amount of Rs.3,52,83,780/- are remitted back to the file of the AO; and the AO shall re-examine the issue as directed by the Tribunal for AY 2010-11 in ITA No.688/Mds/2015 dated 04.03.2016 and thereafter, decide the issue in accordance to law after giving reasonable opportunity to the assessee. 3. Corporate guarantee given to the AE, wherein, the TPO made adjustment of Rs.35,64,938/-. 3.1 The TPO noted that the assessee company has provided corporate guarantee on behalf of its AE and since, no guarantee fee has been collected from its AE, he was of the opinion that 1% of the value of the corporate guarantee should be adjusted and made adjustment of Rs.35,64,938/-. In this regard, the Ld.AR submitted that this issue is covered by the decision of the Tribunal in the assessee's own case for earlier AYs 2009-10 & 2012-13 which relied on the Hon'ble jurisdictional High Court in the case of PCIT vs. Redington (India) Ltd., reported in [2021] 430 ITR 298 (Mad.)(HC) and the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. v. ACIT (LTU) reported in [2014] 52 taxmann.com 395 (Bom.) & 378 ITR 57 and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. It is found that during remand hearing, the appellant has not objected to the action of the AO for making disallowance u/s 35(2AB) of the Act. During appellate proceedings, the appellant stated that the claim of the appellant u/s 35(2AB) is to be allowed in full without any restriction on account of DSIR report in Form No 3CM and 3CL. The appellant relied on the decision of Hon'ble Tribunal in the case of Torrent Pharmaceuticals Ltd ( 28 CCH 781). The appellant further claimed that the expenditure was fully vouched for and was supported by documentary evidence. The DSIR has not given any reason in support of its action, it is seen that the extent of expenditure was never verified by the AO. The appellant has not noted which expenditure was not considered by the D.S.I.R. Therefore, it cannot be ascertained as to whether the expenditure are properly vouched or not, It is also not clear as to why the DSIR has not allowed the claim of expenditure of the appellant. Therefore, it is held that the decision of Hon'ble 1TAT in the case of Torrent Pharmaceutical Ltd is not directly applicable in the instant situation. Further, a plain reading of section 35(2AB}(1) would indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount claimed by the assessee; that the DSIR had not given any reason in support of its action; that as per the DSIR Regulations, the prescribed authority would pass an order after verification of the expenditure; that the assessee had not furnished the reasons for the DSIR's action and no objection had been filed; that the ld. CIT(A) has correctly distinguished the decision of the Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd (2009) 28 CCH 781 (Ahd); that it remains undisputed that the DSIR had not given any reason in support of its action; that the extent of the expenditure was never verified by the A.O.; that the assessee also has not pointed out as to which expenditure was not considered by the DSIR; that in these facts, the ld. CIT(A) cannot be said to have faulted in holding that it cannot be ascertained as to whether the expenditure was properly vouched or not; that it is also unclear as to why the DSIR did not allow the claim of the expenditure as made by the assessee; that, therefore, as correctly held by the ld. CIT(A), Torrent Pharmaceuticals Ltd. (supra) was rightly held to be inapplicable to the facts of the present case. 6. Here it is seen that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred: Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred. Explanation.--For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970). (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner to be prescribed. It is, thus, w.e.f. 01.04.2016 that the provision has been made for approval of quantum of expenditure, for the first time. 11. Further still, in Pune ITAT decision in the case of Cummins India Ltd. v. Dy. CIT (2018) 96 Taxmann.com 576 (Pune-Trib.), which is a decision directly on the issue at hand, it has been held, inter alia, to the fact that though the Rules stipulate the filing of audit report before the prescribed authority by availing the deduction u/s. 35(2AB) of the Act. The provision of the Act prescribed or approved to be granted by the prescribed authority vis-à-vis the expenditure from year to year; that the amendment was brought in by the Income Tax amendment Rules w.e.f. 01.04.2016, wherein, a separate part has been inserted for certifying the amount of expenditure from year to year and the amended Form No. 3CL, thus, lays down the procedure to be followed by the prescribed authority; that prior to the said amendment, no such procedure; methodology was prescribed; and that therefore, in the absence of any such procedure or methodology, the A.O. had erred in curtailing the expenditure and consequent weighted deduction claimed u/s. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of the assessee is correct, as evident from the assessment order itself, wherein the ground for the disallowance was the non approval of the expenditure claimed by the DSIR. 16. On behalf of the assessee, another contention has been raised, that the ld. CIT(A) is wrong in observing that during the remand proceedings, the assessee has not objected to the action of the A.O. in making the disallowance u/s. 35(2AB). This, it has been emphasized, that the assessee had always objected to the disallowance before the A.O. as well as the ld. CIT(A). The attention in this regard has been drawn to the grounds taken by the assessee and the submissions raised by the assessee before the ld. CIT(A). It has further been submitted that in the remand proceedings, qua this issue, no enquiry whatsoever had been made by the A.O., notwithstanding the fact that the remand proceedings were proceedings where the assessee was required to press his claim afresh, which could have only be done by way of objecting to the action of the A.O. 17. Be that as it may, the disallowance stands objected to by the assessee before us, which issue we have answered in the preceding paragraphs. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable on record. As rightly submitted by the Ld. D.R., the assessee's claim of expenditure included fee for software licenses, cost of application software, annual maintenance contract, software development and maintenance charges. The annual maintenance charges and cost of upgradation charges are held to be revenue in nature by the Dispute Resolution Panel and it has to be allowed in the year in which it was incurred. In respect of software licenses, the DRP found that there are two types of licenses one is annual license and another one is permanent license. In respect of annual license, the Dispute Resolution Panel found it to be as revenue expenditure and to be allowed in the year in which it was incurred. As far as permanent license is concerned, the Dispute Resolution Panel found that there was enduring benefit to the assessee. When the assessee bought the software permanently, the initial purchase of software has to be on the capital field since the assessee earned the right over the software. Even though it was licensed to use, the license given to the assessee is exclusively for the assessee. Therefore, this Tribunal is of the considered opinion that the Dispute Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in assessee's own case supra in accordance to law after giving reasonable opportunity to the assessee. 6. Ground Nos.5 to 5.3 relates to disallowance u/s.43B amounting to Rs.1,90,141/-. At the outset, the Ld.AR of the assessee fairly conceded that this issue has been decided against the assessee by the Hon'ble Supreme Court in the case of Exide Industries v. UOI reported in 292 ITR 0470 and therefore, the same stands dismissed. 7. Ground Nos.6 to 6.2 relates to the issue of amortization of capital expenditure (lease hold land amounting to Rs.6,37,836/-). 7.1 At the outset, the Ld.AR of the assessee brought to our notice that the Hon'ble Madras High Court in the assessee's own case (TCA No.498 of 2018) dated 15.03.2021 has set aside the issue back to the file of the AO for re-consideration of the issue. It is noted that before the Hon'ble Madras High Court, the assessee had raised the substantial question of law as under: "Whether Tribunal ought to have granted depreciation under Section 32 on the amount paid to SEZ as it had acquired commercial right for the use of the land for the purpose of business of the Assessee?" 7.2 And the Hon'ble Madras High Court hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on such assets @15% being Plant & Building and allowed a sum of Rs.67,87,050/- and the balance amount of Rs.3,84,59,950/- was added back to the total income of the assessee. The DRP confirmed the same. The Ld.AR of the assessee submitted that the AO failed to appreciate that section 43A applies only towards foreign exchange loss on acquisition of imported assets (Rs 95.59 Lakhs have already been suomoto disallowed by assessee in Return of income) i.e. assets procured from a country outside India and not towards acquisition of indigenous assets. And further Ld AR submitted that if an assessee takes a foreign loan i.e an ECB (External Commercial Borrowing) in foreign currency and it is used for purchasing domestic assets, then there are two points of time to consider: • On every 31-3 date (restatement date) when accounts are drawn up. At this date, the AS-11 standard says the forex receivable/payable of revenue items must be shown in the P&L and is allowable as a revenue deduction if it is a forex loss. Thus on 31-3 of every year, the forex difference on the outstanding loan amount if it is a loss will appear as a deduction in the P&L. Whether this claim is allowable under Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were available, the transactional gain or loss is to be assessed as Revenue. Respectfully following the decision of Hon'ble Supreme Court in the case of Wipro Finance Ltd., supra, we allow the claim of assessee." • The Pune ITAT in Cooper Corporation (P) Ltd Vs DCIT in ITA No 866/PN/2014 has held in para 11 as follows:- "For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss obtained by assessee. The AO disallowed the loss claimed on the ground that the amounts were utilized for acquisition of assets and hence, capital in nature. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after considering the submissions of the assessee noted that gain on fluctuations on account of foreign currency loan taken to acquire fixed capital asset will be treated as capital receipt. Hence, loss on fluctuation on account of foreign currency loans taken to acquire fixed capital assets will be a capital loss. Aggrieved, assessee came in appeal before the Tribunal. 5. Before us, the ld.counsel for the assessee explained that assessee has availed external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for purchase of fixed assets all of which were domestic assets. He contended that assessee did not use the loan to procure assets from abroad. Therefore he argued, that there has been fluctuation in exchange rate viz-a-viz the rate on which loan was availed. The differential or transactional difference has resulted in loss of Rs.37,08,705/- to the assessee. The ld.counsel explained that the AO as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances of the case. Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purpose of fixed assets all of which were purchased from domestic market i.e., domestic assets. The assessee did not use the loan for purchase of assets from abroad. Accordingly, fluctuation in the exchange rate viza-viz the rate at which loans was available, the transactional gain or loss is to be assessed as Revenue. Respectfully following the decision of Hon'ble Supreme Court in the case of Wipro Finance Ltd., supra, we allow the claim of assessee. 8.2 In this case in hand, we note that Forex loss was to the tune of Rs.452.47 lakhs which was on actual payment of loan taken for purchasing domestic assets. Therefore, it needs to be allowed as Revenue expenditure u/s.37 of the Act and is not hit by sec.43A of the Act, which is only when assessee has acquired imported assets; and since, we have noted that assessee has taken External Commercial Borrowings (ECB) for acquiring "indigenous assets" and not for acquisition of imported assets, disallowance made by the AO u/s.43A of the Act was er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 Section 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 monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under Section 37(1), para 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) 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; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation" 9.4 We find force in the submission of Ld AR, and note that the assessee's has claimed Rs.568.33 lakhs as deduction towards foreign exchange loss on restatement of foreign currency loan (on 31st March) which was undisputedly taken towards acquisition of indigenous assets; and assessee as per AS-11 has rightly shown the same (forex loss) in the P & L A/c; and therefore is allowable as revenue deduction, and we order ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon'ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) would favor the case of the assessee. In this decision, it was held that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. 10. Another aspect of the matter is that the assessee is successful in establishing that there was sufficient cash generation to make the aforesaid investments. In fact, overall interest free loans have reduced from Rs.3605.38 Lacs to Rs.3337.22 Lacs during the year. As against this, there was sufficient cash generation to source this investment. Therefore, as per the ratio of Hon'ble Supreme Court in the case of CIT V/s Reliance Industries Ltd. (307 CTR 121), it could be presumed that the investments were made from interest free funds available with the assessee. The ratio of decision of Hon'ble Madras High Court in CIT V/s Hotel Savera (239 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is mutandis apply to this year also. Resultantly, the appeal stands dismissed. 10.2 Before us, the Ld.AR brought to our notice that the assessee had profit after tax to the tune of Rs.95 Crs. and his net worth was Rs.694 Crs. as evident from Page No.10 of the assessment order and the loan given to the sister concern is only to the tune of Rs.9.06 Crs. Therefore, applying the ratio in the case of CIT (LTU) v. Reliance Industries 307 CTR 121, it can be safely presumed that assessee had sufficient own funds, and that advances/loans were given to M/s.SFIL from the interest free funds (own funds) available with the assessee and not from the interest bearing funds (mixed fund of both) and refer to the decision of the Hon'ble Madras High Court in the case of CIT v. Hotel Savera 239 ITR 796 (Mad.) and also the decision in the case of CIT v. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom.). 10.3 In the light of the aforesaid ratio of cases, and based on discussion supra, we direct deletion of Rs.30,80,119/- 11. Ground No.10 to 10.7 relates to the issue of disallowance u/s.14A amounting to Rs.3,77,43,460/-. The AO noted that the assessee company received total amount of Rs.310.88 as di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... next additional ground raised by the assessee is as under: 2. The Deputy Commissioner of Income-tax ought to allow claim of deduction u/s. 10AA of Rs. 11,45,95,653/- for SEZ Unit-l as per the provisions of Sec. 10AA in light of the decision of the Mumbai Tribunal in the case of Reliance Industries Limited in ITA No. 7299/Mum/2017 applying the ratio of the decision of the Apex Court in the case of Vijay Industries in Civil Appeal No.1581/1582 of 2005. 13.1 The Ld.AR submitted on this ground as under: Revised claim of deduction under Section 10AA: Sundram Fasteners Limited (SFL) had established Auto Ancillary Special Economic Zone (SEZ-I) unit at Mahindra World City, Maraimalai Nagar, Chennai. SEZ Unit I commenced its operations in September 2007 which is engaged in manufacture and export of Hubs, shafts and sprockets. During the previous year ended 31st March 2013, SEZ Unit-I had claimed Rs.6,92,16,009/- being the amount eligible as deduction under section 10AA. SEZ Unit-I has been claiming deduction u/s. 10AA after deducting tax depreciation and investment allowance for computing the business income as per Section 10AA of the Income tax Act. The Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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