TaxTMI 
TaxTMI 
2021 (9) TMI 12
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....t liability on the ground that such provision is contingent and not accrued; b. Not appreciating that the provision for employee long terms service benefit is in accordance with provisions of Accounting Standard (AS) 15 - Employee benefit and based on actuary valuation; and c. Holding that employee long term service benefit liability has not crystallized nor has accrued. Grounds related to corporate tax (Miscellaneous expenses) 12. The learned CIT(A) has erred in allowing only 10% of Rs. 73,91,476/- incurred towards construction the School Building, Installation of water purification Plant and Promotion of Japanese Language, without appreciating that the expenses are incurred to promote Toyota Brand and to create awareness about Toyota Products. Hence the expenses are wholly and exclusively for the purpose of business and are allowable. Grounds related to corporate tax (MTM Loss/Gain) 13. The learned CIT(A) has erred in confirming the action of the AO in: a. Disallowing a sum of Rs. 1,76,80,000/-, being mark to market loss on outstanding derivative contracts on the ground that same is notional loss. b. Not appr....
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..... Therefore, the submission of the assessee is that provision is based on the known liability and since the estimation is reliable, the same is to be allowed as deduction. The CIT(A) rejected the contentions of the assessee by observing as under:- "69. I have examined the issue. The appellant is having a scheme wherein it gives a gold coin weighing ten grams to an employee who has completed ten years during the Financial Year. As per the information furnished before me the scheme has started during the Financial Year 2011-12. The date for various years was asked which was furnished as shown in the table above. 70. I asked a question to the appellant's representatives during the hearing as to what happens to an employee who has quit after completing nine years nine months in the organization. It was submitted that such an employee does not get a gold coin. 71. The appellant in the para no. 7.34 of the submission has claimed that in case of provision for employee long term service benefit liability, making of the company policy is the event which gives rise to the obligation. I do not agree with this claim. 72. I find that the liability to pay ....
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....-15. The actuary certified that as on 31.03.2013 (i.e. for the relevant assessment year under consideration), a sum of Rs. 46,60,033 needs to be provided based on certain actuarial assumptions. A copy of the actuary valuation is placed at page 1221 of the paper book filed by the assessee. The AS-15 dealing with "employees benefits" defines the term "employees benefits" to include "other long term employee benefit". The extract of the Accounting Standard reads as follow:- "(c) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing bonuses and deferred compensation; and" 3.4.1. Therefore, if any company provides any long term service benefit to its employees, then the recognition, measurement and disclosure requirements laid out under AS-15 is required to be adhered to. The liability in this case might arise on account of employees completing 10 years of service in future, is therefore, required to be quantified and recognized over a period of time in accordance with the Acc....
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....would arise only if an employee might not go on leave and instead would apply for encashment, held that the provision for accrued leave salary was a contingent liability and, therefore, was not a permissible deduction. The Hon'ble Supreme Court reserved the Hon'ble High Court's conclusion by observing as above. 3.4.3. Therefore, taking into account the judicial pronouncements and the AS-15, we hold that if the liability is an known liability and the estimation of liability is reliable, the provision made for the relevant assessment year cannot be stated to be a contingent liability. In this case, the actuary valuation for claiming provision of Rs. 46,60,033 for the relevant assessment year is placed on record at page 1221 to page 1233 of the paper book filed by the assessee. On perusal of the same, it is not clear as regards the basis of arriving of the above stated provision. In simple terms, if the assessee had made a provision on proportionate basis, i.e., taking into account 10% on an year to year basis for gifting the memento on completion of 10 years of service, we could have understood the valuation report is based on some reasonable basis. Further, when the e....
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....he income u/s. 37." 4.1. Aggrieved, the assessee preferred an appeal to the CIT(A). Before the CIT(A), elaborate written submissions were filed. Copy of the same is placed on record at pages 1094 to 1115 of the paper book filed by the assessee. The gist of the submission as regards expenditure incurred for improving Government School in Manchanayakanahalli Village, it was submitted that the expenses were for the purpose of business, for the following reasons:- (a) Help its employees' children in getting quality education facilities; (b) Ensure that its employees do not migrate in search of better educational facilities; (c) Uplift the morale of the employees and make them more productive; (d) Improve the brand image of Toyota in Manchanayakanahalli and nearby villages. 4.2. As regards the expenditure incurred for installation of water purification plant Byramangala Village, which is 2.5 kms. away, it was submitted that the construction of water purification plant would ultimately benefit assessee's employees and families in getting quality health and it ensure more efficiency at work. It was stated that the expenditure incurred for ....
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....y has benefitted from the above expenditure. This fact has also accepted by the CIT(A) by allowing as deduction 10% of the total expenditure. The amount of Rs. 8,13,782, expended for promotion of Japanese language will also ultimately benefit the employees of the assessee. Taking the overall view and to put a quietus to the issue, we hold that 30% of the total expenditure would have benefitted the employees of the assessee-company. Accordingly, we allow a sum of Rs. 22,17,441 out of the total expenditure of Rs. 73,91,476. It is ordered accordingly. 4.8. In the result, ground No. 12 is partly allowed. Ground No. 13 5. During the year under consideration, the assessee had planned to increase the overall capacity of the plant from 2,10,000 units to 3,10,000 units. The assessee, therefore, required funds to make investment in plant and machinery. The assessee approached bankers and availed Buyers Credit Loan facility from BTMU, Citi Bank and SCB Banks for investment in plant and machinery. The loan facility extended by BTMU, Citi Bank and SCB banks were denominated in Foreign Currency and the interest rate was benchmarked against LIBOR. To protect against fluctuations in forei....
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....al liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as a deduction u/s. 37(1) in the year of fluctuation in the rate of exchange or whether the same could be allowed in the year of repayment of loans. In this regard, the Hon'ble Supreme Court has held that any difference i.e. loss of gain arising on conversion of the outstanding liability relating to forex transaction on revenue account at the end of the year should be recognized in the P&L account for the reporting period. (ii) In view of this, it is clear that the Hon'ble Supreme Court has not adjudicated or decided the issue with respect to mark to market loss on forward contract. Therefore, this decision is not applicable to the facts of the case on hand. 7.7 Accordingly, in the light of the Board's instruction, it is held that the 'marked to market losses' claimed by the assessee on account of restatement of receivables at the end of the financial year on the basis of forward contracts are not allowable as revenue expenditure. Hence, the entire loss claimed by the assessee of Rs. 1,76,80,000 is disallowed an....
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.... purposes had been allowed as deduction by the A.O. The assessee, however, wants that restatement of the hedging transaction should be allowed as revenue expenditure. This claim of the assessee is not mandated as per the judgment of the Hon'ble Supreme Court relied on by the A.O. as well as the provisions of the Income-tax Act. As rightly pointed out by the CIT(A), the A.O. had in letter and spirit followed the judgment of the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd. [ (2009) 312 ITR 254 (SC)], reiterated in the case of Oil and Natural Gas Corporation Ltd. v. CIT [ (2010) 322 ITR 180 and in the case of CIT v. Maruti Udyog Limited [ (2010) 320 ITR 729]. Further, underlying reason for availing the foreign loans are for purchase of plant and machinery, which is admittedly is on the capital front and cannot be allowed as a revenue expenditure. Therefore, the CIT(A)'s order confirming the assessment order on this issue is in accordance with law and no interference is called for. It is ordered accordingly. 5.8. In the result, ground No. 13 is dismissed. ITA No. 2016/Bang/2018 (Asst. Year 2013-14) (Revenue's appeal) 6. The ground....
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....) erred by not upholding the approach of the TPO in determination of ALP on royalty transaction. 12. For these and such other grounds that may be urged at the time of hearing." We shall adjudicate the above grounds as under: Ground No. 2 - Inclusion of Tata Motors Limited 7. The assessee in its TP study, applied 25% RPT filter whereby companies having related party transactions (income transactions plus expenses transactions) in excess of 25% of sales were rejected as comparables. The assessee rejected Tata Motors Limited and Maruti Suzuki India Limited as comparable companies by holding that these companies was having RTP in excess of 25%. The TPO selected the above two companies as comparables. The TPO in his order relied on Tribunal's order in the case of Support Soft India for assessment year 2005-2006 in IT(TP)A No. 1372/Bang/2011. 7.1. Aggrieved, the assessee preferred an appeal to the first appellate authority. According to the assessee, TPO had applied 25% filter, but there is no discussion in the order passed u/s. 92CA of the I.T. Act whether the said filter has been applied by aggregating both income and expenses transactions or has been applied s....
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....Limited has deviated and adopted a new mechanism for computing RPT ratio. On a query from the Bench how RPT ratio has been calculated for other comparables, the learned AR has unable to point out the same. The RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. The said position was adopted by the Revenue in the past years. In this regard, the TPOs order in assessee's own case for assessment year 2007-2008 has been placed on record. A perusal of the same it is clear that RPT ratio has been calculated taking both RPT income transactions plus RPT expenses transactions on aggregate basis. On the facts of this case, it is not clear how RPT ratio has been calculated for Tata Motors Limited vis-à-vis other comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. 7.5. Therefore, ground No. 2 is allowed for statistical purposes. Ground Nos. 3 and ....
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....accepted the submissions of the assessee and directed the AO/TPO to provide for both positive and negative working capital adjustment. 9.2. Aggrieved, the Revenue has raised this issue before the Tribunal. The learned AR reiterated the submissions made before the Income Tax Authorities. 9.3. We have heard rival submissions and perused the material on record. The working capital adjustment is an accepted adjustment. In the following judicial pronouncements, it has been held that working capital adjustment has been provided for the purpose of better comparability. (a) Swiss Re Global Business Solutions India (P.) Ltd. v. DCIT [2020] 116 taxmann.com 716 (Bangalore - Tribunal) (b) Maxim India Integrated Circuit Design Pvt. Ltd. v. DCIT [IT(TP)A No. 1573/Bang/2017 dated 02.11.2020. 9.4. In view of the above judicial pronouncements, we hold that the CIT(A) is justified in directing the AO to grant working capital adjustment. It is ordered accordingly. 9.5. Therefore, ground Nos. 5 and 6 are allowed. Ground Nos. 7 and 8 - TP adjustment should be restricted to AEs transactions. 10. The assessee submitted before the AO/TPO that out of the total transactio....
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....nsaction and part of operating cost. The TPO rejected the above stand of the assessee and benchmarked the royalty transaction as per the ALP computation of assessment year 2012-2013. 11.1 Before the CIT(A), the assessee reiterated the submissions made and filed a detailed objection against the analysis of TPO. The CIT(A) called for a remand report. In the remand report, the TPO rejected the claim of the assessee by referring to the order of the Tribunal in assessee's own case for assessment year 2005-2006. The assessee filed a rejoinder to the remand report. The CIT(A) partly allowed the ground of the assessee by holding that TPO has to follow consistent approach and should adopt net sales as denominator for the purpose of comparing royalty in case of comparables and the assessee. 11.2. Aggrieved, the Revenue has raised this issue before the Tribunal. The learned DR supported the order of AO/TPO. 11.3. The learned AR reiterated the submissions made before the Income Tax Authorities. 11.4. We have heard rival submissions and perused the material on record. The AO/TPO had made TP adjustment for shortfall in margins as well as royalty. The royalty adjustment has been m....
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....the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT(A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon'ble Delhi High Court held that the "transfer pricing guidelines" laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage restructuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed....
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....tly studying these objections, the DRP cryptically approved the TPO's position of 'nil' ALP. In AY 2009-10 however, the DRP has discussed in elaborate detail the assessee's objections on similar grounds and has arrived at the conclusion that the assessee not only received the technology support as well as the related intangibles in terms of production processes, but has also benefitted from these technological practices, standards and know-how which were not created locally by itself. The Toyota Production System, standardized on a world-wide basis, has also been studied for its operational efficiency by premier academic institutions. I am inclined to agree with this conclusion after examining the facts of the appellant's case and the evidences available. The TPO's argument that no benefit was derived by the appellant from the technology for which royalty was paid is not supported by facts and evidences. The fact that the royalty rate was within the permissible limit specified by the Govt. of India and approved by the RBI is an additional argument in support of the legitimacy of the said payment. 10.4 In view of the above discussion, the TPO's d....