AI Drafter 
TaxTMI 
TaxTMI 
2020 (5) TMI 531
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....9;s Length Price of Royalty paid of Rs. 2,20,00,000/- crores for the Taloja Plant as NIL inter alia holding that the plant had received patented technology and support for manufacturing of float glass from Asahi Glass Company, Japan in lieu of royalty payment and no independent company which provide such services free of charge. 2. In deleting the addition amounting to Rs. 84,93,675/- made on account of provision for gratuity to book profit as per provision of section 115JB of the Income Tax Act 1961." 3. Appellant, M/s. Asahi India Glass Limited (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 03.02.2014 passed by the ld. Commissioner of Income-tax (Appeals)-XX, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2008-09 on the grounds inter alia that :- "1. That the learned OT(A) erred on facts and under the law in upholding the action of the assessing officer in making disallowance of Rs. 963964/- u/s 14A read with Rule 8D of the IT Rules under the normal provisions of the IT Act and u/s 115JB. No nexus between the interest paid on borrowe....
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....pan were considered as AE of taxpayer. 6. During the year under assessment, taxpayer entered into international transactions with its AE as under :- International Transaction Automotive Float Method Purchase of raw material 66.7 - TNMM Import of stores & machinery spares 8.94 0.076 TNMM Import of clear float and reflective glass - 4.17 TNMM Purchase of Capital Goods 44.53 - TNMM Import of refractories bricks & machinery - 34.61 TNMM Royalty for use of technical knowhow 4.29 14.65 TNMM Fee for Technical consultancy services, repair & maintenance, exhibition, engineering services 3.3 7.15 TNMM Commission Income on Sales - 1.33 TNMM 7. The taxpayer in order to benchmark its international transactions used Transactional Net Margin Method (TNMM) with Operating Profit/Sales (OP/Sales) on an entity-wise basis as the Profit Level Indicator (PLI) as the Most Appropriate Method (MAM), chosen 5 comparables having margin of 2.5% as against taxpayer's margin of 9.76%. To demonstrate arm's length nature of its royalty payment, taxpayer had adopted comparable rate for Sona Koya Steeri....
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....cepted royalty of Rs. 10.95 crores paid to Glaverbel Nederland BV for float glass manufactured at Roorkee unit but taken the adverse view in case of its Taloja unit on the ground that licence technology availed by the taxpayer from AGC Japan has failed to generate any economic value for taxpayer's business and thereby reduced the amount to Rs. 2,20,00,000/- on account of royalty to nil by using CUP method. Detail of royalty payment made by the taxpayer in its float glass division is as under :- Particulars Amount (INR crores) Patent Details Float Glass (Taloja) 2.22 4940479 Float Glass (Roorkee) 7.16 US 2005/ 0028559 Reflective Glass 3.59 US RE 40, 315E Mirror 0.20 190380 Total 13.17 12. The detail of margin of taxpayer's two plants, namely, Tajola and Roorkee plants for manufacture of float glass is as under :- Particulars Taloja Roorkee Float Glass Segment revenue - - - External 27,250 22,725 49,975 Inter segment sales (Net of excise duty) 1,275 4,445 5,720 Total revenue 28,525 27,170 55,695 Segment result -108 2,240 2,132 Operating Profit / S....
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....ed by the ld. CIT (A) in favour of the taxpayer in AY 2007-08 and appeal filed by the Revenue has also been dismissed by the Tribunal vide order dated 26.02.2018 passed in ITA No.2183/Del/2014, copy of order is available at pages 70 to 110 of the paper book. 17. Perusal of the order dated 26.02.2018 passed by the coordinate Bench of the Tribunal in ITA No.2183/Del/2014 goes to prove that identical issue as to determining ALP of royalty paid by the taxpayer company for its Tajola plant of the taxpayer at nil has been decided in favour of the taxpayer by returning following findings :- "46. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the ld. CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO made an addition Rs. 4.09 crores to the total income of the assessee by disallowing payment of royalty by the assessee to its AE being at arm's length price. We find the ld. CIT(A) deleted the addition made by the AO/TPO, the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in th....
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.... Further, the royalty paid by the assessee to AE for float glass technology has been accepted by the Department in the earlier years. We also find merit in the submission of the ld. counsel for the assessee that since the assessee is a public limited company with only 22.21% shareholding by its AE and Indian promoters holding 33.03% and the general public holding 44.76%, therefore, the AEs were not in a position to wield significant influence over assessee's business as its performance and commercial expediency were subject to intense scrutiny by shareholders of the companies which are listed on BSE and NSE. We further find the Revenue has accepted the royalty paid at the rate of 3% by Sona Steering Systems Ltd. to its AE which is much more than 1.71%. Further, in the immediately preceding year 2006-07, the Tribunal had directed the TPO to include Bharat Glass Tube Ltd. and Triveni Glass Ltd. as comparables. If these two companies are included as comparables, the average margin comes to 1.39% which is much less than the operating margin of 6.02% of the assessee company. 48. We find the Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. (supra) has held tha....
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....upport for the manufacturing of float glass from AGC Japan in lieu of royalty payment, the same cannot be disallowed on the basis of conjectures and surmises. So, ld. CIT (A) has rightly deleted the addition made by the AO/TPO, hence ground no.1 of Revenue's appeal is determined against the Revenue. GROUND NO.2 OF REVENUE'S APPEAL (ITA No.2501/DEL/2014) 19. Ld. CIT (A) deleted the addition of Rs. 84,93,675/- made by the AO on account of provision for gratuity to book profit u/s 115JB of the Act. 20. Ld. DR for the Revenue by relying upon the order passed by the AO contended that when the provision for gratuity has been made on the basis of actuarial and actual payment of gratuity is deferred to a later date on the happening of a certain event, namely, death or voluntary retirement of the employees which are unascertained events, the provisions made by the taxpayer is for ascertained liability, AO has rightly added back the same to the book profit of the taxpayer u/s 115JB of the Act. 21. However, on the other hand, ld. AR for the taxpayer contended that this issue has also been decided by the Tribunal in favour of the taxpayer by dismissing the appeal filed by the Re....
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.... we find no illegality or perversity in the deletion made by the ld. CIT (A), hence ground no.2 of Revenue's appeal is deleted. GROUND NO.1 OF ASSESSEE'S APPEAL (ITA NO.1638/DEL/2014) 24. AO by invoking the provisions contained u/s 14A read with Rule 8D made a disallowance of Rs. 9,63,964/- under the normal provisions of the Act as well as u/s 115JB of the Act which has been confirmed by the ld. CIT (A). 25. Ld. AR for the taxpayer challenging the impugned order passed by the ld. CIT (A) contended that since the taxpayer has suo motu disallowed an amount of Rs. 2,96,016/- u/s 14A of the Act on account of expenses incurred to earn the dividend income of Rs. 7,47,820/-, no further disallowance can be made as the AO has not recorded any satisfaction if the working given by the taxpayer is not correct and relied upon the decisions rendered by Hon'ble Supreme Court in Godrej & Boyce Co. Ltd. vs. DCIT 394 ITR 449 and Hon'ble Delhi High Court in the cases of CIT vs. Taikisha Engineering India Ltd. 370 ITR 338, CIT vs. Hero Management Service Ltd. 360 ITR 68 and Maxopp Investment Ltd. vs. CIT 347 ITR 272. 26. Ld. AR for the taxpayer further contended that the issue as to the....
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....ved in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd., 116 ITR 1 (SC), wherein, it has been held that fluctuation on account of foreign exchange rate is an allowable deduction and is not capital in nature. The observation of the Hon'ble Supreme Court is as under:- "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature(emphasis supplied)" 57. At the end we may further observe that when profits are being taxed by the department in respect of such unmatured forward foreign exchange contracts then there was no reason to disallow the loss as claimed by assessee in respect of same contracts on the same footing. ....
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....gn exchange contracts then there was no ground to disallow the loss as claimed by the taxpayer in respect of the same contracts on the same footing. The entire detail is there on record. Even otherwise, the obligation accrued against the taxpayer the minute it entered into forward foreign exchange contracts. So, the forward foreign exchange contracts debited to the profit & loss account are allowable one being the liability having been crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty. So, we are of the considered view that disallowance of Rs. 16,70,000/- is liable to be deleted, hence deleted. Ground No.2 is determined in favour of the taxpayer. GROUND NO.3 OF ASSESSEE'S APPEAL (ITA NO.1638/DEL/2014) 33. Ld. CIT (A) confirmed the disallowance of Rs. 39,09,11,373/- on account of foreign currency gain on the ground that taxpayer did not furnish any supporting document in respect of its claim to prove that the gain of reinstatement of liability of Foreign Currency Loan - External Commercial Borrowing taken for acquiring capital goods by applying the provisions contained u/s 43A of the Act. 34. Undisputedly, th....
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....s. Woodward Governor of India Pvt. Ltd. 312 ITR 254 decided the identical issue in favour of the taxpayer by returning following findings :- "We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove are undisputed. There is no dispute that the provisions of section 43A of the Act would become applicable for recognizing the exchange fluctuation if the loan was obtained for acquisition of fixed assets only at the time of making payment and accordingly the exchange gain, if any, would go to reduce the cost of the fixed asset. Since in the instant case, the exchange gain is derived only on a notional basis and is unrealized, by applying the provisions of section 43A of the Act, the said gain needs to be reduced from the taxable income. We also find that the Learned Assessing Officer having accepted to the facts of the case and the relevant provision of the Income Tax Act in his remand report, ought not to have come on appeal before us on this issue. We also find that this issue is covered by the decision of the Supreme Court in the case of CIT vs Woodword Governor of India P Ltd reported in 312 ITR 254 (SC) wherein the pri....