AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (11) TMI 1145
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..../2015, for the Assessment Year 2011-12 passed under Section 143(3) read with Section 144C(3) of the Act. 2.2. The Assessee has raised the following grounds of appeal in ITA No. 5260/Mum/2017: GROUND NO. I & II: TREATING CORPORATE GUARANTEE AS AN INTERNATIONAL TRANSACTION AND THEREBY MAKING AN ADDITION OF NOTIONAL CORPORATE GUARANTEE FEES OF Rs. 2, 73,48,125/ 1. On the facts and the circumstances of the case and in law, the Ld CIT(A) erred in regarding the guarantee given by Appellant to its AE as an international transaction' under section 92B of the Act and in making an addition on account of notional guarantee fees 2 The Ld Assessing Officer/TPO failed to appreciate and ought to have held that: (i) The ultimate beneficiary of the loan was the Appellant itself while the AF, a company registered in Canada, AV Transworks Limited ('AVTL) was merely a route for availing the funds and investing in Canada, in pursuit of the Appellant's own objective of business expansion, (ii) An "international transaction"" would arise only when the foreign subsidiary defaults in making the payment of loan to the bank. Therefore, section 92(1) of the Act would, primarily, not be ....
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....ITYA BIRLA NUVO LIMITED AND THEREBY MAKING AN ADDITION OF INCOME OF Rs. 14,37,11,341/- 1. On the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in upholding the addition of Rs. 14,37,11,341 on the ground that the accounting entry for premium has not been passed in the year under consideration 2. On the facts and the circumstances of the case and in law, the Ld CIT (A) erred in upholding the addition on the ground that the transaction details were not verified by the AO since the Appellant had not filed the details 3. The Appellant prays that the AO/TPO be directed to delete the aforesaid addition amounting to Rs. 14,37,11,341- GROUND NO. VI: GENERAL The Appellant craves leave to add, to amend, to alter and/ or to delete all or any of the above grounds of appeal." 2.3. The Revenue has raised the following grounds of appeal in ITA No. 5280/Mum/2017: "1) On the facts and in law, the Ld.CIT(A) erred in directing the TPO to adopt 0.5% as the ALP of the Guarantee Commission charges provided by the assessee company, without appreciating that the TPO had determined this ALP taking into consideration entity, country specific, currency risk and also co....
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....ntered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) under Section 92CA(1) of the Act. The TPO vide order dated, 01/01/2015, passed under Section 92CA(3) of the Act proposed upward transfer pricing adjustment of INR 13,25,46,700/- consisting of the following: SNo. Transfer Pricing Adjustment Amount (INR) 1 Adjustment for Interest charged on loan given to AEs 10,51,98,575/- 2 Adjustment on account corporate guarantee 2,73,48,125/- Total 13,25,46,700/- 3.2. The Assessing Officer incorporated the above transfer pricing adjustment in the Draft Assessment Order, dated 16/03/2015, passed under Section 143(3) read with Section 144C(1) of the Act. In the aforesaid Draft Assessment Order, the Assessing Officer computed the income of the Assessee at 'Nil' after making other additions/disallowances. Since the Assessee did not exercise the option of filing objections before the Dispute Resolution Panel, the Assessing Officer passed the Final Assessment Order under Section 143(3) read with Section 144C(3) of the Act on 07/05/2015 assessing the....
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.... Tribunal on the grounds reproduced in paragraph 2.2 above. Ground No. I, II & III pertain to the transfer pricing adjustment. Ground No. IV pertains to disallowance of deduction under Section 35D of the Act. Ground No. V pertains to disallowance of premium paid on repayment of optionally convertible debentures raised as an additional claim during the assessment proceedings. The Revenue has also filed cross appeal on the grounds reproduced in paragraph 2.3 above. Ground No. 1 pertains to the transfer pricing adjustment on account of guarantee commission directed by the CIT(A) to be recomputed at the rate of 0.5%, Ground No. 2 pertains to claim of interest & other expenses allowed by the CIT(A) as per Section 36(1)(iii) of the Act of the Act, Ground No. 3(i), 3(ii) & 3(iii) pertains to allowance of claim of ESOP Expenses. Appeal by Assessee (ITA No. 5260/Mum/2017, AY 2011-12) 4. We would first take grounds raised by the Assessee in the appeal. Ground No. I & II 4.1. Ground No. I & II raised by the Assessee are directed against the order of CIT(A) confirming the order passed by the Assessing Officer holding that providing corporate guarantee to AE constitutes an international tra....
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....rt of independent chartered accountant wherein the aforesaid rate has been computed at 0.263%. The Revenue has also challenged the order of the CIT(A) reducing the arm's length guarantee fee rate of 2.5% determined by the Assessing Officer/TPO to 0.5%. 4.8. On perusal of the decision of the Mumbai Bench of the Tribunal in case of the Assessee for the Assessment Years 2008-09 & 2009-10 [ITA No. 610 & 520/Mum/2013 and ITA No. 4276 & 4790/Mum/2015, dated 25/08/2016], we find that the Tribunal has held as under: "14. Ground No. 1 of Assessee's appeal in ITA No. 620/M/13 For A.Y. 2008-09, Grounds Nos: 1, 2 and 3 of Assessee's Appeal No. 4276/M/2015 for A.Y. 2009-10, and Ground No. 1 of Revenue's Appeal No. 4790/M/2015: Issue involved is : Transfer Pricing Addition in respect of Corporate Guarantee. 15. The assessee company has given Corporate Guarantee to DBS bank by way of deeds of guarantee for loan taken by AV Transwork Ltd, Canada, (AVTL Canada) amounting to USD 24.5 million. The assessee company has not charged commission to AVTL Canada. The AO/TPO based on the order for A.Y. 2007-08 has held that the appellant company ought to have charged a cost of guarantee of 3....
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....08, 2008-09 and 2009-10, Ground No. I & II raised by the Assessee are dismissed. Ground No. III 5. Ground No. III raised by the Assessee is directed against the Transfer Pricing Adjustment of INR 10,51,98,575/- on account of interest on loan to Associated Enterprises. 5.1. The Assessee had given a loan in Canadian Dollar (CAD) to AVTL, Canada and a loan in US Dollar (USD) to Aditya Birla Minacs, Philippines. It was contended by the Assessee that the aforesaid loans were granted from own funds, and therefore, no interest was charged from the AEs. However, at the time of filing return of income, the Assessee voluntary made an adjustment in the computation of total income by computing interest at the rate of 1.53% (i.e. Average US LIBOR + 1%) in case of interest free USD loan to Aditya Birla Minacs Philippines and at the rate of 5.50% in case of interest free CAD loan to AVTL, Canada. 5.2. Further, the Assessee had also given loan to AVTL, Canada in Japanese Yen (JYP), and had charged interest at the rate of 1.02%. The aforesaid loan was advanced out of the loan taken by the Assessee from DBS, Singapore at the rate of LIBOR + 0.5% (JYP Loan). Thus, the Assessee had recovered mark ....
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....he decision dated 16/03/2016, passed by the Tribunal. Vide order dated 16/03/2016, Co-ordinate Bench of the Tribunal has, in identical facts and circumstances, has accepted LIBOR plus 1% as arm's length rate of interest while holding as under: "After considering the rival submissions and on perusal of the impugned finding and the facts as noted above, the only the issue how before us, is whether the loan advanced by the assessee to its 100% subsidiary AE in Canada on which the assessee had charged interest @ LIBOR +1% is at arm's length or not. The Ld. CIT(A) has applied six months LIBOR + 200 basis points based on RBI guidelines and after using external commercial borrowed rates. Whereas, the assessee's case is that the assessee has used internal CUP of LIBOR + 0.65% which was determined on the basis of loan availed by the assessee form DBS bank @ LIBOR+0.45%+ 0.20%, which were for the period of 5 years. Based on this internal CUP, the international transaction providing the loan to the AE has been benchmarked therefore, charging of interest at LIBOR + 1% was at arm's length price. It is an undisputed fact that, the loan has been given to the AE in a foreign currency....
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....ch continue to hold the field, we do not find any merit in the contention advanced by the Assessee that no transfer pricing adjustment was warranted. The decision of CIT(A) to hold LIBOR + 1% as arm's length rate of interest in respect of loan for AEs is in line with the above decisions of the Tribunal in the case of the Assessee. Accordingly, Ground No. III raised by the Assessee is dismissed. Ground No. IV 6. Ground No. IV raised by the Assessee is directed against the disallowance of INR 4,65,200/- under Section 35D of the Act in respect of stamping charges paid on further issue of shares. 6.1. In view of the statement made by the Ld. Authorised Representative for the Appellant, under instructions, that the Assessee does not wish to pursue this ground on account of insignificant amount involved, Ground No. IV raised by the Assessee is dismissed as not pressed. Ground No. V 7. Ground No. V raised by the Assessee is directed against the disallowance of claim of proportionate premium paid arising on account of repayment of optionally convertible debentures. 7.1. The relevant facts in brief are that the Assessee had issued Compulsorily Convertible Debentures ("CCD") of INR 250....
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.... paid on redemption of Debentures. 7.6. Being aggrieved, the Assessee has carried this issue in appeal before us. 7.7. We have heard the rival submissions and perused the material on record. 7.8. The contentions raised on behalf of the Assessee (including on the issue of nature of premium paid on redemption of debenture and the year of allowance of deduction) can be summarized as under: (a) The return for the relevant assessment year was filed on 28/11/2011, while the premium on OCD was paid on 24/03/2014. Accordingly, the claim became available to the Assessee only after return was filed and hence, an additional claim was made during the course of assessment proceedings. (b) CCDs are in the nature of debt and not equity. Until its conversion into equity, the same remains a debt. It does not carry any voting rights or any right to receive dividend. Hence the same cannot be considered to be equity until its conversion. Reliance was placed on the following case laws: CAE Flight Training (India) Pvt. Ltd. [IT(TP)A No. 2060/Bang/2016, Bangalore-Trib.]; TE Connectivity Services India (P.) Ltd. v. NFAC (145 taxmann.com 214) (Bangalore - Trib.), IMS Health Analytics Services Priv....
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....de-hors of commercial realities as a return of 624% p.a by the issuer company can, by no stretch of imagination, be regarded as a commercially acceptable recompense from the point of view of issuer. Based on the commercial realities, the premium paid should be considered as pertaining to the use of money for the entire period beginning from the date of issue of CCDs till the date of redemption and not just from the date of conversion. (f) In the present case, the premium on debentures was debited to securities premium account. This is as per the provisions of Section 78 of the Companies Act, 1956 (for Short 'the Companies Act'). The Companies Act permits application of securities premium account towards various types of expenses, some of which are capital in nature, while some are revenue in nature. For example, expenses on issue of loan/debentures has been held to be an allowable revenue expense by the Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT (60 ITR 52) (SC). Similarly, discount/ premium on issue/redemption of debentures has been held to be allowable expense by the Hon'ble Supreme Court in Madras Industrial Investment Corporation Ltd. Vs. CIT (225 ....
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.... The issue raised for consideration before us is whether the Assessee is entitled to claim deduction for the proportionate premium amount during the relevant assessment year since according to the Assessee the deduction for premium is to be allowed over the term of the debentures. 7.11. We note that when the CCDs were initially issued the Assessee had no obligation to pay premium, interest, or charges in relation to the CCDs as the same were convertible into equity on expiry of 60 months as per the conversion formula which was to be mutually agreed by the Assessee and the subscriber/holder of CCDs. 7.12. Therefore, for the relevant previous year no interest/premium/charges were accounted for or paid by the Assessee during the relevant previous year. Even if it is accepted that CCDs continued to be debt during the relevant previous year, the same would be of no consequence as no interest/premium/charges were either payable or paid in respect of such debt. During the relevant previous year the Assessee neither had any obligation to pay interest as the CCDs were zero-coupon unsecured debenture, nor did the Assessee had any obligation to redeem the debentures as the CCDs were compuls....
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....arties cannot form the basis of allowance of claim made by the Assessee. It is admitted position that at the time of modification of terms the CCDs were held by ABNL which was ultimate holding company of the Assessee. It is not the case of the Assessee that the modification of terms on which debentures were issued was occasioned by the circumstances beyond the control of the Assessee. On conversion of CCDs into OCDs, the subscriber/holder diluted their obligation to subscribe for equity shares of the Assessee and got an option to seek redemption of debentures in addition to the right to get shares on conversion. From the perspective of the Assessee, as an alternative to allotment of shares, the Assessee could now be asked to redeem the debt amount at a premium. The capital appreciation in the value of shares of the Assessee from the date of subscription of CCDs till the date of conversion from CCDs to OCDs was not accounted for or recorded while agreeing upon the modified terms by the parties and therefore, there is nothing on record to enable us to examine/determine the impact of the commercial trade-off between the original and modified terms at this stage. Further, it is admitte....
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....nt Year 2008-09 and 2009-10 [Income Tax Appeal No. 778 & 867 of 2017, dated 04/09/2019], has held as under: "4. The Revenue urges the following three identical questions of law in both appeals for our consideration:- 1. Whether on facts and in the circumstances of the case and in law, the Tribunal was justified in directing the AO/TPO to adopt 0.5% as the ALP of the guarantee commission charges provided by the Respondent Co.; without appreciating that the TPO had determined the ALP taking into consideration entity, country specific, currency risks and also considering the leveraged position taken by the assessee company which had an impact on its working capital? 2. Whether on facts and in the circumstances of the case and in law, the Tribunal was justified in its direction that the money advanced to the AE as share application money is not to be considered as loan, ignoring the fact that this money was being utilized as working capital and not deposited in an escrow account in cases where monies are received in cases of share application? 3. Whether on facts and in the circumstances of the case and in law, the was justified in directing the AO to delete the disallowance u/....
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....by the Revenue is dismissed. Ground No. 2 10. Ground No. 2 raised by the Revenue is directed against the order of CIT(A) deleting the disallowance of INR 31,40,45,133/- made by the Assessing Officer under Section 36(1)(iii) of the Act in respect of the interest and other expenses incurred for acquisition of shares of a subsidiary company. 10.1. Being aggrieved, the Assessee carried the issue in appeal before CIT(A) who allowed the appeal of the Assessee on this issue and deleted the disallowance of INR 31,40,45,133/- made under Section 36(1)(iii) of the Act, inter alia, by following the decision of the Tribunal in the case of the Assessee for the Assessment Year 2008-09 [ITA No. 610 & 520/Mum/2013] and 2009-10 [ITA No. 4276 & 4790/Mum/2015]. 10.2. Being aggrieved, the Revenue in now in appeal before us. 10.3. We have considered the rival submissions and perused the material on record. 10.4. We note that the CIT(A) had deleted the disallowance of INR 31,40,45,133/- made by the Assessing Officer under Section 36(1)(iii) of the Act by placing reliance upon the common order, dated 25/08/2016, passed by the Mumbai Bench of the Tribunal in the case of the Assessee disposing of cros....
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....peal before us for A.Y. 2008-09 and for A.Y. 2009-10 the Revenue is in further appeal before us against the order of the CIT (A) who has deleted the addition made by AO. 29. We have carefully considered the rival submissions and gone through the facts and circumstances of the case. The Ld. Departmental Representative for the Revenue has primarily reiterated the stand of the Assessing Officer and CIT (A). On the other hand, the Ld. AR for the assessee company stated that assessee company wanted to expand its existing business operations in North America and European countries. It had the option to either set up of branch in those countries or form new companies in those countries or acquire some operative company having business activities and presence in those countries. In order to attain the ultimate object of expanding operation in different geographies the assessee decided to acquire Minacs Worldwide Inc, Canada (Minacs Canada), existing operative company which was in similar line of business as that of the assessee i.e. BPO and Call centre activities. Due to regulatory restrictions in Canada and also for having ease of business, the assessee decided to set up a Special Purpo....
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....r section 36 (1) (iii) of the Act, and we accordingly direct the Ld. CIT (A)/AO to delete the addition for A. Y 2008-09. For A. Y. 2009-10 we do not hesitate to confirm the order of the CIT(A). 32. In the result, the ground No. 5 of Assessee's appeal in ITA No. 620/M/13 for A. Y. 2008-09 is allowed and grounds Nos. 4(a) & 4(b) of Revenue's Appeal No.4790/M/2015 for A.Y 2009-10 is dismissed." 10.5. On perusal of above, we find that the Tribunal has allowed deduction for interest and other expenses incurred by the Assessee under Section 36(1)(iii)/37 of the Act on the ground of commercial expediency/exigency as such interest & other expenses were incurred in connection with the loans taken by the Assessee for DBS Bank which has been utilized for making investment in AVTL, Canada which had acquired Minacs Worldwide Inc, Canada, leading to significant rise in the business of the Assessee. 10.6. We note that the appeal preferred by the Assessee against the above order of the Tribunal on the issue of deletion of disallowance under Section 36(1)(iii) of the Act has been dismissed by the Hon'ble Bombay High Court vide order, dated 04/09/2019, passed in Income Tax Appeal No. 778....
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....ccount is being made to the total income of the assessee since no deduction was claimed in the computation of total income." 11.2. Being aggrieved, the Assessee carried the issue in appeal before CIT(A). Following the above decision of the Special Bench of the Tribunal relied upon by the Assessee during the assessment proceedings, the CIT(A) allowed the claim of deduction of INR 4,50,38,317/- in respect of ESOP Expenses under Section 37 of the Act. The relevant extract of the decision of the CIT(A) reads as under: "9.1. Decision: I have considered the facts of the case and submission of the Appellant which is extracted as above. Having taken note to the same and also after taking note to the specific observations of the Special Bench in the case of Biocon Limited (144 ITD 215), I consider it proper and appropriate to hold that the appellants claim of deduction of Rs. 4,50,38,317/- u/s 37 of the Act is completely justified and correct in the given facts of the appellants case as detailed above. Hence, I consider it proper and appropriate to direct the AO to allow the claim of the appellant of Rs. 4,50,38,317/- u/s 37 of the Act. Thus, the appellant's this ground of appeal i....
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.... of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which were prepared in Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. In support of aforesaid submission reliance has been placed on decision in CIT v. UP State Industrial Development Corpn. [1997] 92 Taxman 45/225 ITR 703 (SC), Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). It is also urged that the decision relied on by the revenue does not support its case and the issue with regard to deduction of ESOP has been decided by different High Courts. In this connection, reference has been made to CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.), CIT v. Lemon Tree Hotels Ltd. IT Appeal No.107/2015 dated 18-8-2015, Pr. CIT v. Lemon Tree Hotels Ltd., [2019] 104 taxmann.com 26 (Delhi). It is also pointed out that from the Assessment Year 2009-10, the Assessing Officer has accepted the claim of the assessee and has permitted ESOP expenses as deduction. Therefore, the revenue cannot be now permitted to alter its stand. 5. By way of rejoinder reply, learned counsel for the reven....
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...., officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting yea....
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....9-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in A. Gajapathy Naidu,Morvi Industries Ltd. and Keshav Mills Ltd.(supra) support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd.'case (supra). 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Asse....
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....mission shall exceed 0.236% as per the Guarantee Benchmarking report of an Independent Chartered Accountant The Appellant prays that the AO/TPO be directed to delete the aforesaid addition amounting to Rs 2,73, 48,125/- or be directed to reduce the notional guarantee fee addition appropriately. GROUND 2: ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM INTEREST ON LOANS ADVANCED TO AE'S: 1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in partly upholding the adjustment by AO/ TPO on account of notional interest charged on the loans advanced to AEs on the alleged ground that it is not at arm's length price 2. The Ld. CIT(A) failed to appreciate and ought to have held that: (i) the Appellant had charged interest on the loans advanced to its AE's at the rate that was higher than the London Inter-Bank Borrowing Rate (LIBOR") and other international benchmarking rates which is used as the international standard for lending and borrowing of funds and considering the direct commercial interest of the Company no addition was justifiable on loan given to its AE (ii) Benchmarking the loan transaction of JPY to AVTL Can....
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....vided by the assessee company without appreciating that the TPO had determine this ALP taking into consideration entity, country specific, currency risk and also considering the leveraged position taken by the company which had an impact on its working capital? 2. On the facts and in law the Ld. CIT(A) erred in directing the AO to delete the disallowance of interest and other expenses incurred for acquisition of share of a subsidiary company without appreciating the facts that acquisition of business by way of investing in to shares cannot be considered to be ordinary event of business and therefore, cannot be turned as expenditure incurred for the purpose of assessee's business. 3. a. On the facts and in the circumstances of the case, the Ld CIT(A), erred in not appreciating the fact that, the claim for ESOP expenses was made for the first time in A.Y. 2010-11 in the return of income, which was disallowed by the assessee in the computation of income sou- moto, and the assessee has not made any revised claim of the ESOP expenses u/s 37(1), either before the AO or before the DRP. Hence, the issue was settled and agreed upon both by the assessee as well as the department in A....
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....Assessment Year 2012-13 by the Assessee is identical to Ground No. I & II raised in appeal by the Assessee for the Assessment Year 2011-12 which has been dismissed hereinabove. Accordingly, in view of our finding/adjudication in paragraph 4 to 4.10 above, Ground No. 1 raised by the Assessee is also dismissed. Ground No. 2 16. Ground No. 2 raised by the Assessee is directed against the Transfer Pricing Adjustment of account of interest on loan to Associated Enterprises to the extent sustained by the CIT(A). 16.1. Ground No. 2 raised in appeal for the Assessment Year 2012-13 by the Assessee is identical to Ground No. III raised in appeal by the Assessee for the Assessment Year 2011-12 which has been dismissed hereinabove. Both sides agreed that the there is no change in the facts and circumstances of the case. Accordingly, in view of our finding/adjudication in paragraph 5 to 5.8 above, Ground No. 2 raised by the Assessee is also dismissed. Ground No. 3 17. Ground No. 3 raised by the Assessee for the Assessment Year 2012-13 is directed against the order of CIT(A) confirming the disallowance of deduction for proportionate premium of INR 12,35,78,287/- on redemption of optionally ....
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....view of our finding/adjudication in paragraph 9 to 9.3 above, Ground No. 1 raised by the Revenue is dismissed. Ground No. 2 23. Ground No. 2 raised by the Revenue is directed against the order of CIT(A) deleting the disallowance of INR 11,79,22,003/- made by the Assessing Officer under Section 36(1)(iii) of the Act in respect of the interest and other expenses incurred for acquisition of shares of a subsidiary company. 23.1. Ground No. 2 raised by the Revenue in appeal for the Assessment Year 2012-13 is identical to Ground No. 2 raised in appeal for the Assessment Year 2011-12 which has been dismissed hereinabove. Accordingly, in view of our finding/adjudication in paragraph 10 to 10.7 above, Ground No. 2 raised by the Revenue is dismissed. Ground No. 3(a) & 3(b) 24. Ground No. 3(a) & 3(b) raised by the Revenue is directed against the order of CIT(A) accepting the claim of the Assessee pertaining deduction of Employee Stock Option Scheme (ESOP) expenses of INR 1,24,67,729/- which was rejected by the Assessing Officer. 24.1. Ground No. 3(a) & 3(b) raised by the Revenue in appeal for the Assessment Year 2012-13 by the Revenue is identical to Ground No. 3(i), 3(ii) & 3(iii) rais....
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....al business loss. Further, there is no allegation that the loss is on capital account. Therefore, the Assessing Officer was not justified in disallowance deduction for 'Mark to Market' loss a legitimate debit to the Profit & Loss Account as per the mercantile system of accounting regularly followed by the Assessee. Reliance was also placed on the judgments cited by the CIT(A) while allowing the claim of the Assessee and other judicial precedents including the decision of the Tribunal in the case of Deputy Commissioner of Income Tax, Circle 3(2), Hyderabad Vs. M/s Suven Life Sciences Ltd. [ITA No. 1222/Hyd/2016, dated 27/09/2017]. 25.5. We have considered the rival submissions and perused the material on record. It is admitted position that for hedging the exposure against the risks of foreign exchange losses that may arise in the course of its export activities, the Assessee entered into forward contracts with bankers from time to time. The Assessee had claimed deduction for foreign exchange loss of INR 7,15,92,175/- booked by the Assessee as 'Mark to Market' loss. However, the Assessing Officer disallowed deduction for the same concluding as under: "8.6 In the case of Badridas ....
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....010, issued by CBDT, the Assessing Officer concluded that the aforesaid judgment could not be followed and therefore, on the basis of Instruction No. 3 of 2010, the Assessing Officer disallowed the deduction for mark to market loss of INR 7,15,92,175/-. In our view, while Instruction No. 3 of 2010, dated 23/03/2010, was binding upon the Assessing Officer, the same was not binding on the courts or this Tribunal. In this regard, it could be pertinent to the refer to the judgment of the Hyderabad Bench of the Tribunal in the case of M/s Suven Life Sciences Ltd. (supra) wherein the Tribunal had rejected the identical reasoning given by the Assessing Officer and allowed the claim of the Assessee for deduction of 'Mark to Market' losses holding as under: "7. As regards Grounds of appeal 3 & 4, we find that this issue had arisen in the assessee's own case in the earlier A.Ys 2006-07 to 2009-10 and the Tribunal has considered the issue at length at Paras 21 to 28 and has held as under: "21. According to the Revenue the 'marked to market loss' is only notional or contingent loss until the contract is settled and as per the ground of appeal raised by the Revenue, such derivative ....
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....uction No.3 of 2010 dated 23.3.2010. The learned counsel for the assessee, on the other hand, supported the order of the CIT(A). 26. Having heard both the parties and having considered their rival contentions, we find that undisputedly, the assessee had entered into foreign exchange forward contract to hedge against risks of foreign exchange fluctuations and though the contract has not matured during the relevant financial year, in order to arrive at actual profits or loss to the assessee, it followed the Accounting Standard 11 and 31 issued by ICAI as notified by sec. 211(3C) of me Companies Act and had debited the loss on account of 'mark to market losses' as on the closing day of the accounts and claimed it as allowable as business loss. We find that Instruction No.3 of 2010 of CBDT has been reproduced by the CIT (A) at Para 7.4 of his order. As per this instruction, where no sale or settlement has actually taken place and the loss oil, contract has not matured, the loss on 'marked to market' basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income and shou....
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....ntrary. In view of the same, we do not see any reason to interfere with the order" of the CIT(A) and the Revenue's appeal for the assessment year 2009- 10 is also dismissed". (Emphasis Supplied) 8. Since the CIT(A) has only followed the precedent on the issue in the assessee's own case, we do not see any reason to interfere with her order. Thus, grounds of appeal Nos. 3 & 4 are rejected." 25.7. Same view has been taken by the Ahmadabad Bench of the Tribunal in the case of Tribunal DCIT Vs Suzlon Energy Limited (ITA No. 2179/AHD/2013) which has been affirmed by the Hon'ble Gujarat High Court in PCIT Vs. Suzlon Energy Ltd. [reported in 120 Taxmann.com 459]. The relevant extract of the decision of the Tribunal in the aforesaid case reads as under: "16. In ground no.2, the Assessing Officer has raised the following grievance :- "2). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in allowing notional loss on account of foreign exchange fluctuation loss amounting to Rs. 1,26,42,63,740/- claimed on account of Mark to Market basis." 17. Learned Representatives fairly agree that this issue is squarely covered by a decision of the co-or....
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....ss. None of these submissions, however, impressed the Assessing Officer. Relying upon CBDT Instruction No. 3 of 2010, the Assessing Officer proceeded to disallow this claim on the ground that the loss had not crystallized and the loss was only notional. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the said disallowance. While doing so, in a very well reasoned and analytical order, learned CIT(A) observed as follows: I have carefully perused the assessment order and the submissions given by the appellant. It is to be seen as to whether the Appellant has satisfied the test laid down by the Supreme Court of India in the case of CIT Vs. Woodward Governor India (P) Ltd. [312 ITR 254 (SC)] to know whether the foreign exchange loss incurred during the year under consideration is allowable to the Appellant or not. Each of such condition laid down by the Apex Court is discussed hereunder: Condition No.1 Whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately i....
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.... by the ICAI. Various authorities have held that while determining allowability of an expenditure, accounting standard has a great persuasive value: Challapalli Sugars Ltd. Vs. CIT (1975) [98 I.T.R. 167 (SC)]. Further following authorities have held that foreign exchange fluctuation loss suffered on account of circulating capital or revenue account should be treated as revenue expenditure in the year in which the devaluation takes place when the method of accounting followed is mercantile. * 116 ITR 1 (SC) * 154 ITR 460 (Cal) * 90 ITR 323 (Ker) * 97 ITD 125 (Ahd) (TM) @ 151 para 8.28 Accordingly, this itself establishes that the Appellant has adopted the system of accounting which is fair and reasonable and supported by the Accounting Standard AS -11, Rule 115 and various authorities and not adopted to avoid incidence of income tax. And in any case, as submitted by the Appellant, in the same assessment year under appeal before Your Honour, the Appellant has earned foreign exchange gain which has been offered for taxation, which itself shows that the system adopted by the Appellant is consistent, fair and reasonable. In view of the above facts and the fact the issue is cov....
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....roach that the assessee had raised the grievance. 7. In the case of Woodward Governor (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon'ble Supreme Court and there was similar inconsistency in treatment to losses and gains on the forward contracts. Their Lordships, dealing with this issue and holding that such a loss will be deductible in computation of business profits, observed as follows: "[xx 13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word "expenditure" in s. 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-à-vi....
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....as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Sec. 145(1) enacts that for the purpose of s. 28 and s. 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with s. 28. Therefore, s. 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (See ....
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....9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under s. 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should b....
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....r our consideration: "Whether on the facts and in the circumstance of the case and in law, the Tribunal failed to appreciate that loss due to revaluation of forward exchange contracts being mark to market loss was only notional and contingent in nature, and therefore, cannot be set off against taxable income as per CBDT instruction 03/2010 dated 23.03.2010?" 3. It is an agreed position between the parties that the issue raised herein stands concluded against the Appellant-Revenue by the decision of this Court in CIT v/s. M/s. D. Chetan & Co., (ITXA No. 278 of 2014) dated 1st October, 2016. 4. However, .......learned Counsel for the Revenue states that in view of the Instruction No.3 of 2010 dated 23rd March, 2010, the issued by the CBDT contend that, loss in such case is notional and contingent in nature and same should be added but for the purpose of computing taxable income. The aforesaid submission was the basis of the order of the Assessing Officer and not accepted by this Court in M/s. D. Chetan & Co., (supra). Therefore, the above Circular/ Instruction would not have any application in the face of the decision of this Court in M/s. D.Chetan &Co., (supra). 5. In the ab....
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....erred in holding that "Mark to Market" loss of Rs. 89,59,018/- is not a notional loss, and therefore allowable? 2. On the facts and circumstances of the case and in law, whether the Ld. CIT(A) has erred in allowing MTM losses of Rs. 4,06,80,762/- pertaining to AY 2012-13 3. On the facts and in the circumstances of the case, whether the Ld. CIT(A) has erred in not appreciating the fact that the claim for ESOP expenses was made for the first time in AY 2010-11 in the return of income which was disallowed by the assessee in the computation of income suo-motto, and the assessee has not made any revised claim of the ESOP expense u/s. 37(1), either before the AO or before the DRP. Hence, the issue was settled and agreed upon both by the assessee as well as the Department in AY 2010-11 itself that the assessee was not entitled to claim the said expenditure. 4. On the facts, and in the circumstances of the case, whether the Ld. CIT (A) has erred in not appreciating the fact that, the assessee has adopted a colorable method to claim the ESOP expenses, by raising the claim of expenses before the AO and not through the return of income filed by it? 5 On the facts and circumstances of ....
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....cation before the CIT(A) and had not attained finality. 31.1. In appeal preferred by the Assessee, the CIT(A) directed the Assessing Officer to reduce the amount of Mark to Market Losses pertaining to Assessment Year 2012-13 recording as under: "11. Decision I have gone through the appellant's submission. The appellant has contended that though CIT(A) has allowed the appellant's appeal in 2012-13 but as the department has gone in appeal before ITAT and if ITAT gives the decision in favour of appellant then the amount of MTM loss written back in current year should be excluded from the taxable income. I find the appellant's contention is correct. Hence AO is directed to allow the MTM loss. This ground of appeal is allowed subject to above observation." 31.2. The Revenue is now in appeal before us. 31.3. We have heard the rival contention and perused the material on record. In appeal for the Assessment Year 2012-13, we have confirmed the order of the CIT(A) allowing deduction for Mark to Market Loss claimed by the Assessee, therefore, the reversal of such Mark to Market Losses or part thereof during the Assessment Year 2013-14, is to be treated as income of the Assessee and th....