TaxTMI 
TaxTMI 
2016 (3) TMI 1209
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....ricing Officer (TPO) and the TPO determined the TP adjustment of Rs. 3,18,09,842/-. This adjustment has been proposed on advances given to its subsidiary and according to the TPO, since the loans are advanced from India Bond rate of 'BB rating' should be considered as against the 6% PA received by assessee. He adopted a rate of 14.74% in respect of the loans advanced and proposed an addition. On assessee's objections, the DRP deferred from its findings in earlier year and accepted the TPO's adjustment, hence the grounds under TP adjustments. AO in addition has also raised various issues pertaining to Section 35D, foreign exchange fluctuations, depreciation on computer software and working out deduction u/s. 10AA as against assessee's claims. Another issue on non-granting of foreign tax credit is also involved. Aggrieved on the DRP's orders, assessee is in appeal and raised as many as 32 grounds. Likewise, Revenue is also aggrieved on the DRP's directions allowing some of the contentions of assessee and accordingly, Revenue has raised four material grounds in its appeal. 3. We have heard the Ld. Counsel for assessee and the Ld. DR and perused the Paper Books placed on record. ....
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....e accepting the credit rating at BB, directed the TPO to adopt average credit risk spread from the 'Loan Connector' database. The TPO, as stated earlier, did not do such exercise and adopted the same rate of interest and made addition. 13.2. It was submitted by the ld. counsel that assessee's rate of interest is on par with LIBOR rates which is generally being accepted by the ITAT in a number of cases. Further, it was submitted that Thomson Reuters's Loan Connector database was mentioning 2.53% being paid by companies rated as BB in comparable transactions and if 1% LIBOR rate is increased, the effective interest rate would be 3.53% which is still lesser than 6% rate received by the assessee. 13.3 It was further submitted that the Hon'ble Bombay High Court in the case of Tata Autocomp Systems Ltd., 56 taxman.com 206 (Bom) has upheld the interest rate being charged in the country where the loan is received/consumed. Accordingly, it was submitted that USD LIBOR rate is an average of 2.854%. Accordingly, assessee's interest received being at 6% should be considered at arm's length. 13.4 We have considered the contentions and perused the orders of authorities....
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....t FCCBs are in the nature of debentures and hence are eligible to be calculated as part of 'capital employed in the business of the company' for allowing deduction 35D of the Act. Even though ITAT did not agree on the other issue of excluding securities premium and assessee is in appeal before the Hon'ble Karnataka High Court, the assessee submitted that the eligible amount based on the ITAT order in this regard as under:- Sl. No. Particulars Amount (in INR) 1. GDR Face Value (as already allowed by AO) 117,287,280 2. FCCBs (As per Tribunal's order at para 35 and 36) 7,807,500,000 3. Capital Employed 7,924,787,280 4. 5% of capital employed 396,239,365 5. 1/5th of 5% of capital employed (claim allowable consequent to Tribunal's order) 79,247,872* * As against the claim of INR 1,172,873 computed by the ld. AO. We direct the AO to examine the above and allow relief as in earlier years, since claim is arising in earlier years. With this, this ground is considered as allowed. Respectfully following the same, we direct the AO to examine and allow as in earlier years and these grounds are considered as allowed. 9....
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....ount of foreign currency to the contracting bank at a date and rate specified in the agreement. Since the period of contract is spread over some times into the next accounting year, following the Accounting Standards AS-11, mark-to-market (MTM) losses or gains are determined and accounted for under the head 'foreign exchange gains/losses'. 16.1 It was submitted that during the financial year relevant to AY 2009-10, assessee has entered into hedging contracts with various banks. Some of these above contracts did not mature till 31.3.2009. Accordingly, the MTM losses to an extent of Rs. 9,72,32,040 was booked in the books of account on the basis of exchange rates prevailing on 31.3.2009 in accordance with AS-11. 16.2 The AO treated the losses as speculative in nature and contingent in nature and disallowed the same. The DRP also accepted the opinion of the AO. 16.3 It was submitted that assessee has consistently followed the same method of accounting with regard to MTM gains/losses on option contracts. For the years where there is MTM gain, assessee had dully offered the gain to tax and in years where there has been MTM losses, assessee claimed the same as ....
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....d Governor (P) Ltd. (supra) and ONGC v. DCIT, 322 ITR 180 in fact support the assessee's contentions that these transactions are not contingent in nature. It was further submitted that these are also not speculative in nature. 16.6 The ld. DR, however, relied on the order of AO and read out the Instruction as issued by the Board and analysed that transactions entered into by the assessee are both speculative in nature and the losses booked are contingent in nature. 16.7 We have considered the rival contentions. As stated by the Auditors, assessee has entered into option contracts/forward contracts for the purpose of hedging the risk associated with foreign exchange exposure only to the extent of receipts in the earlier years, which is less by Rs. 60 crores of total foreign currency received during the year. This indicates that assessee has entered into contracts on the anticipated receivables in order to protect the variations in fluctuation market. The Hon'ble Supreme Court in the case of ONGC v. DCIT, 322 ITR 180, has considered similar claims. In fact, in that case, assessee was engaged in capital intensive exploration and production of petroleum products for w....
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....ue/cost vide para 8.3, we are unable to understand how the AO can take a decision now treating it as a speculative loss, contrary to the direction of the DRP. In view of this, Ground Nos. 14 & 15 is allowed. 10.1. Coming to the issue in Ground Nos. 16 & 17, the facts are that assessee has issued FCCBs amounting to Rs. 780.75 Crores for the purpose of acquisition of Subex America INC, a overseas subsidiary. The investment in Subex America's INC amounting toRs. 774.95 Crores appears in schedule 'G' to the financial statements. Assessee has recognized unrealised foreign exchange fluctuation gain amounting to Rs. 91.88 Crores on restatement of FCCBs and credited the same to its P&L A/c. However, restatement gain being related to investment in Subex America was not offered to tax in the return of income. AO has not allowed the exclusion from the computation of income. The DRP it seems allowed the said income to be operational income while considering the TP adjustments. Assessee has not questioned the above order of the DRP in TP matter. However, as far as the issue whether un-realized foreign exchange gain on FCCBs should be treated as 'income' or not has been concluded in favour of....
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....s of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002)." Thereafter in para 22 of its judgment it dealt with cases where the fluctuation is on account of capital items as follows:- "Facts in M/s Honda Siel Power Products Ltd. (Civil Appeal arising out of SLP(C) No. 7632/08) Capital account case : 22. The main issue which arises for determination in this batch of civil appeals is : whether the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date pending actual payment of the varied liability. In this batch of civil appeals, we are concerned with increase in the existing liability on account of foreign exchange fluctuations on "capital account"." 40. After considering the provisions of Sec.43A of the Act, the Hon'ble Supreme Court held that Sec. 43A(1) applies where as a result of change in rate of exchange there is an increase or reduction in the liability of the assessee in terms of Indian rupees to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specif....
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....ents issued to investors for raising funds which is repayable after certain period. It is a debt instrument. The increase or decrease in liability on account of fluctuation in foreign exchange as on the date of the Balance sheet would increase or decrease the liability of the Assessee and such liability would be on capital account. Therefore the gain or loss would be on capital account and not taxable. We accordingly hold in favour of the Assessee on this issue". Respectfully following the same, we direct the AO to treat the above amount as on capital accout, to be adjusted in capital accounts. However, if any benefit was obtained by assessee in the TP provisions by treating this amount as operational income, we direct the AO/TPO to examine the working again, so as to exclude the amount from the computation and if any adjustment is required. Assessee cannot take advantage of its own stand to the detriment of Revenue in TP provisions. There should be a constant approach. Treatment of this gain as operational income does not arise as the same was not treated as income, therefore any computation based on that has to be reexamined. This issue can be considered by the TPO afresh and ....
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.... Ltd. V. DCIT [(2010) 132 TTJ 498 (Delhi Tribunal)]; c. CIT V. Mark Auto Industries Limited [ITA No. 57 of 2009 - unreported (Punjab and Haryana High Court]; and d. SKOL Breweries Ltd. V. ACIT [(2013) 29 taxmann.com 111 (Mumbai Tribunal)], etc. 13.1. Another contention raised is that the AO wrongly calculated the depreciation @ 60% considering the assets to be used for more than 180 days. It was submitted that an amount of Rs. 1,23,240/- was pertaining to purchases of less than 180 days on which, thee was excess disallowance of Rs. 36,972/-. 14. We have considered the rival contentions and examined the provisions of Section 40(a)(ia). As per the provisions of Section 40(a)(ia), what the AO can disallow invoking the said provision is only with reference to interest, commission/brokerage, rent, royalty, fees for professional services or fees for technical services or amounts payable to a contractor or sub-contractor. It is not known how the AO can treat the software purchases as part of the above amounts. In fact the definition of 'royalty' as provided in Explanation-vi to the above sub-section also does not cover the software purchases as held by the Co-ordin....
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....insurance or expenses incurred in foreign currency and hence, the said expenses ought not to be reduced from the 'export turnover'. 15.2. It was brought to the notice of the AO that, the aforesaid expenses relate to both the SEZ units and not SEZ Unit 2 alone and also for reasons stated above, none of the aforesaid expenses were required to be reduced from the 'export turnover'. AO, however, proceeded to reduce all the aforesaid expenses from the 'export turnover' of SEZ Unit 2 for the purpose of computing deduction under section 10AA of the Act. 16. We have considered this issue also in the appeal for AY. 2009-10 in IT(TP)A No. 223/Bang/2014 and decided as under: "18.4 We have considered the rival contentions and perused the arguments placed on record. As far as definition of export turnover as provided in Explanation 1 to section 10AA is concerned, the same is slightly different from Explanation 2 to section 10A which was already considered in various cases earlier. In fact, decision of Patni Telecom (P.) Ltd. (supra) and Willis Processing Services (supra) are given in the context of section 10A. Explanation 1 to section 10AA is as under:- "Explanation 1 :....
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....side India but it is sufficient if the same is attributable to the said purpose. The assessee's business being development and export of computer software, all the expenditure incurred by it is attributable to the delivery of articles or things or computer software outside India. If the Legislature has intended that the said charges should be directly incurred for the purpose of delivery of articles or things or computer software outside India, then the Legislature would not have used the word 'attributable' but would have used the word 'incurred' for the delivery of articles or things as has been done in the second part of the said definition with regard to the expenditure incurred in foreign exchange in providing technical services outside India. In view of the same, we are of the opinion that the telecommunication charges and insurance charges are indirectly included in the export turnover of the assessee and therefore it has to be necessarily reduced from the export turnover for the purpose of computation of deduction u/s 10A of the Act. " 18.6 Therefore, the expenses which are attributable to delivery of articles or things outside India are to be excluded from the exp....
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....ssee had in fact became eligible for 100% deduction u/s. 10AA profit as quantified by the AO. We find that the above discussion is purely of academic nature, as practically there is no grievance of the assessee, since deduction was allowed at 100% on the alternative ground accepted by the DRP. Since the assessee has contested the issue in the grounds and since we find that these expenditures are not related to the expenditure of the nature as specified in Explanation 1, we adjudicated this contention on merits. The grounds are considered as allowed". Respectfully following the above, we direct the TPO to exclude the amounts which are considered for disallowance, other than those expenses pertaining to freight, telecommunication charges or insurance attributable to the delivery of articles or things outside India or directly relatable to service outside India. Grounds are considered allowed accordingly. 17. Ground No. 27 pertains to the issue of non-grant of Foreign Tax Credit to the extent of Rs. 1,18,35,826/-. It was claimed that assessee paid taxes in foreign jurisdictions by way of taxes withheld by the customers in overseas jurisdictions and is therefore eligible to claim....
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....unt also presupposes that identity of the payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. Therefore, TDS provisions cannot be invoked in a case where the person who is to receive the professional charges cannot be identified at the stage at which the provisions for professional charges accrued but not due is made. Accordingly, no tax was required to be deducted at source in respect of the provision for professional charges payable made by the assessee which reflected provision for 'professional charges accrued but not due' in a situation where the ultimate recipient of such 'professional charges accrued but not due' could not have been ascertained at the point of time when the provisions was made. Therefore, the assessee did not have any liability to deduct tax at source in respect of provision for professional fees accrued but not due. 9.2 In view of the above the objection relating to disallowance of professional charge u/s. 40(a)(ia) on account of non deduction of TDS is hereby accepte....