2021 (9) TMI 1477 - AT - Income Tax

Tribunal decision: Appeal partly allowed, directing fresh consideration on specific issues.

M/s. Flint Group India Pvt. Ltd., Versus. The Deputy Commissioner of Income Tax, Circle -3 (1) (1), Bengaluru.

M/s. Flint Group India Pvt. Ltd., Versus. The Deputy Commissioner of Income Tax, Circle -3 (1) (1), Bengaluru. - TMI Issues Involved:1. Unabsorbed cost adjustment due to underutilized capacity.2. Treatment of foreign currency transaction and translation losses.3. Disallowance of duty credits written off.4. Disallowance of admission fees paid for employee's child.5. Disallowance of irrecoverable insurance claims.Issue-wise Detailed Analysis:1. Unabsorbed Cost Adjustment Due to Underutilized Capacity:The assessee, a wholly owned subsidiary of Flint Group (Mauritius) Ltd., engaged in manufacturing and trading of printing ink, contested the Dispute Resolution Panel's (DRP) decision upholding the Assessing Officer's (AO) stand on not providing unabsorbed cost adjustment due to underutilized capacity. The assessee argued that the relocation of its manufacturing facility from Bangalore to Vadodara resulted in significant underutilization of capacity, with only 57% of the capacity utilized. The Tribunal noted that in a similar case for AY 2014-15, it had remanded the issue to the Transfer Pricing Officer (TPO) to grant an adjustment for capacity utilization by obtaining relevant information from comparable companies. Following this precedent, the Tribunal set aside the AO's order and remanded the issue for fresh consideration, directing the TPO to gather and share information on capacity utilization of comparable companies and provide the assessee an opportunity to respond.2. Treatment of Foreign Currency Transaction and Translation Losses:The assessee contended that losses from foreign currency fluctuations should be treated as non-operating expenses. The TPO included these losses in operating costs, which the DRP upheld. The Tribunal referred to the Bangalore Bench's decision in SAP Labs India Pvt. Ltd. vs. ACIT, which held that foreign exchange fluctuation gains are part of operating profit. Consistently followed by various ITAT Benches, this precedent led the Tribunal to conclude that foreign exchange gains/losses arising from revenue transactions should be considered as operating revenue/cost for both the assessee and comparables. Consequently, the AO's inclusion of forex losses as operating costs was upheld.3. Disallowance of Duty Credits Written Off:The assessee claimed a deduction for duty credits written off due to loss of original invoices during relocation, which prevented claiming countervailing and excise duty credits. The AO disallowed this, holding it claimable only on a payment basis under Section 43B. The DRP directed the AO to verify the write-off and consider it as a bad debt if substantiated. The Tribunal, citing the Chandigarh Bench's decision in Mohan Spinning Mill v. ACIT, concluded that the write-off should be allowed as a business expenditure under Section 37(1), as the loss was incidental to business and crystallized in the year of write-off. The Tribunal directed the AO to allow the deduction.4. Disallowance of Admission Fees Paid for Employee's Child:The assessee reimbursed an employee's child's school admission fees due to the employee's transfer. The AO disallowed this, considering it personal expenditure and not a business expense. The DRP upheld this view, citing lack of demonstrated business expediency. The Tribunal agreed, noting that the expense should be regarded as a perquisite in the employee's hands, which was not done. Consequently, the disallowance was upheld, and the assessee's reliance on unrelated case law was dismissed.5. Disallowance of Irrecoverable Insurance Claims:The assessee claimed a deduction for irrecoverable insurance claims related to transit damage losses. The AO disallowed this due to lack of evidence showing rejection of the insurance claim, which the DRP upheld. The Tribunal noted that in a similar case for AY 2014-15, it had remanded the issue for the AO to verify the details of the rejected claim. Following this precedent, the Tribunal remanded the issue to the AO, directing the assessee to furnish the required details and the AO to examine the claim accordingly.Conclusion:The appeal was partly allowed for statistical purposes, with specific issues remanded for fresh consideration and verification, ensuring the assessee is provided an opportunity to present relevant evidence. The Tribunal's directions aimed to ensure a fair and thorough reassessment of the disputed matters.