9911796707
TMI Blog2024 (7) TMI 1587X X X X Extracts X X X X X X X X Extracts X X X X ..... Windbolt GmbH, Germany 35,365,000.00 9% p.a. 1,48,53,174 2.1 According to the TPO, it can be seen from the chart (supra) that the assessee has charged interest @9% for the loans given to one of the related company M/s Windbolt GmBH, Germany, whereas, it has charged only 6% on the loans given to other two related parties. So, according to him, interest rate 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s between the borrowed loan and advance given by the assessee to the AEs at Germany. Since the factual scenario on this issue are similar to that of the AY 2010-11 & 2011-12, we are of the considered view that the matter needs to be reconsidered in the light of the observations made by this Tribunal for AY 2010-11. Accordingly, the orders of the lower authorities 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 Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial Research ('DSIR' for short), in Form No. 3CL was less as compared to the deduction claimed by the assessee. The A.O. made the disallowance of Rs.42,52,032/- on this basis. The ld. CIT(A) has confirmed the assessment order on this score, by observing as follows: 7.2 I have carefully perused the assessment order and the submission of the appellant. 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 whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the ld. CIT(A) has correctly undone the A.O.'s action of denying the assessee's weighted deduction of Rs.42,52,032/-, including the amount of Rs.28,34,688/-, being the actual expenditure incurred @ 100% of the expenditure u/s. 35(1)(iv) of the I.T. Act; that the eligible expenditure, as per the DSIR, in Form No. 3CL was lower as compared to the amount 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 ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the quantum of expenditure. For ready reference, section 35(2)(AB) reads as under: Expenditure on scientific research. 35. (2AB)(1) Where a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ightly pointed out, such aspect stands confirmed by sub- rule (7A) of Rule 6 of Income Tax Rules, as within subsisting (now amended w.e.f. 01.07.2016), to provide for quantification of expenditure as well. The Finance Act, 2015 as amended to sub section (3) of section 35 w.e.f. 01.04.2016, providing for furnishing of reports in the 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 N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Independent Auditor and Tax Auditor. 15. The assessee is found correct in contending that the ld. CIT(A) has observed that the extent of the expenditure was never verified by the A.O. Thus, according to the assessee it goes to confirms that the A.O. disallowed the claim without due application of mind. This contention 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee brought to our notice that similar issue had come up before this Tribunal in the assessee's own case for AY 2011-12 and the Tribunal was pleased to set aside the matter back to the file of the AO by observing as under: 13. We have considered the rival submissions on either side and perused the relevant material available 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce fee, which issue was set aside back to the file of the AO to verify the nature of expenditure as observed (supra); therefore, respectfully following the same, we set-aside the impugned order on this issue back to the file of the AO to verify the nature of expenditure as observed (supra) and decide the issue as directed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s" the foreign exchange fluctuation on the same is allowable. However, the AO didn't agree and cited the decision of the Hon'ble Supreme Court in the case of ACIT v. M/s.Elecon Engineering Co. Ltd., reported in [2010] 322 ITR 20 (SC), and he was of the opinion that assessee is only eligible for depreciation 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as drawn down and utilized for the purpose of fixed assets all of which were purchased from the 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 viz-a-viz the rate at which loans 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is engaged in the business of manufacture and sale of API and bulk drug intermediates. The AO during the course of assessment proceedings noticed that the assessee had claimed loss of Rs.37,08,705/- arising out of foreign exchange fluctuation in respect of foreign loss 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2014 and Chennai Bench in the case of TVS Motor Co. Ltd., in ITA No.1153/Mds/2016 & 1183/Mds./2016. 6. When these were pointed out to ld. Senior DR, he only relied on the assessment order and that of the CIT(A). 7. We have heard rival contentions and gone through facts and 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting treatment for the effects of changes in foreign exchange rates. 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 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 ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were utilized to expand overseas market. It is also an undisputed fact that all these entities generated dividend and the assessee was benefitted by way of dividend, capital appreciation and ease of operations. Thus the test of commercial 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 CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A), on similar findings, has deleted the additions. Aggrieved, the revenue is in further appeal before us. 15. Since facts as well as issue is similar in this year, our findings as well as adjudication as for AY 2006-07 shall mutatis 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,27,618/- as business expenditure. At the outset, the Ld.AR does not press the same, since it was covered against the assessee by the decision of the Hon'ble Supreme Court. Therefore, this additional ground stands dismissed. 13. The 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 deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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