2016 (11) TMI 201 - AT - Income Tax

Tribunal rules in favor of assessee, upholding CIT(A)'s deletions and allowances under IT Act

The Tribunal upheld the deletions made by the Ld. CIT(A) on all grounds, including the allowance of provision for liquidated damages, foreign exchange ... Disallowance of the provision for liquidated damages - Held that:- Assessee is eligible for the deduction in respect of provision for liquidated damages as revenue expenditure allowable u/s 37(1) of the Act. Foreign exchange fluctuation loss - Held that:- The issue relating to foreign exchange fluctuation loss is decided in favour of the assessee and against the Revenue. See CIT Vs Woodward Governor [2010 (6) TMI 65 - BOMBAY HIGH COURT]. Issues Involved:1. Deletion of addition on account of disallowance of provision for liquidated damages.2. Deletion of addition on account of foreign exchange fluctuation loss.3. Deletion of addition for the purpose of computing book profit u/s 115JB of the IT Act.4. Deletion of addition on account of transfer pricing adjustment u/s 92CA(3) of the IT Act.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Disallowance of Provision for Liquidated Damages:The Tribunal noted that the issue of liquidated damages had been covered in the assessee's favor for the Assessment Years 2001-02, 2002-03, 2003-04, and 2004-05. The Tribunal had previously concluded that the provision for liquidated damages was allowable as a liability accrued in the year under appeal under section 37(1) of the Act. The Tribunal observed no change in the facts and circumstances for the year under consideration compared to previous years. Respectfully following the earlier decisions, the Tribunal held that the assessee was eligible for the deduction in respect of the provision for liquidated damages as revenue expenditure allowable under section 37(1) of the Act.2. Deletion of Addition on Account of Foreign Exchange Fluctuation Loss:The Tribunal observed that the issue of foreign exchange fluctuation loss had been covered in the assessee's favor for the Assessment Years 2002-03, 2003-04, and 2004-05. The Tribunal referred to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Woodward Governor (I) Pvt. Ltd., which held that the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year is allowable as a deduction and is not merely notional or contingent. The Tribunal found no change in the facts and circumstances for the year under consideration and, following the earlier decisions and the Delhi High Court ruling, decided the issue in favor of the assessee and against the Revenue.3. Deletion of Addition for the Purpose of Computing Book Profit u/s 115JB of the IT Act:The Tribunal noted that the issue had been covered by the orders for the Assessment Years 2003-04 and 2004-05. The Tribunal upheld the findings of the Ld. CIT(A), which were in consonance with the view taken by the Tribunal and the Hon'ble Delhi High Court in the cases of CIT vs. HCL Commet System & Services. The Tribunal found no illegality or infirmity in the well-reasoned orders of the Ld. CIT(A) deleting the impugned additions made by the Ld. A.O. in respect of the provisions for the purpose of computing book profits u/s 115JB. Consequently, the Tribunal upheld the orders of the Ld. CIT(A) and rejected ground No.3 of the Revenue's appeal.4. Deletion of Addition on Account of Transfer Pricing Adjustment u/s 92CA(3) of the IT Act:The Tribunal examined the issue of transfer pricing adjustment where the Ld. TPO had added a markup of 6% on cost reimbursements related to the wireless segment, enhancing the total income by Rs. 3,19,22,989/-. The Ld. CIT(A) had deleted the adjustment made by the Ld. TPO, and the Revenue was in appeal. The Tribunal noted that the assessee acted merely as a facilitator for its AE and did not undertake any significant functions, employ significant assets, or bear significant risks with respect to the cost reimbursement transaction. The Tribunal found that the transaction of cost recharge for the supply of hardware was a mere pass-through cost, timely reimbursed to the assessee by the AE, and did not warrant a markup since no service was being rendered. The Tribunal confirmed the findings of the Ld. CIT(A) and dismissed this ground of appeal raised by the Revenue.Conclusion:The appeal filed by the Revenue was dismissed in its entirety, with the Tribunal upholding the deletions made by the Ld. CIT(A) on all grounds. The order was pronounced in the open court on 12th September 2016.