TaxTMI 
TaxTMI 
2024 (11) TMI 1419
X X X X Extracts X X X X
X X X X Extracts X X X X
....dis for assessment year 2016-17. IT(TP)A No.33/Chny/2021: (AY 2015-16): 3. Ground Nos.2 to 2.1(a), 2.3 and 2.4 relates to the issue of TP adjustment towards international transactions amounting to Rs.6,54,47,655/-. The relevant observations of the TPO is found at page 11 under para 7 of the TPO order, wherein he observes as under:- "The crux of the issue is the interest on the loans given is waived by the assessee though the loans charged with 3M EURIBOR + 3.5% p.a (3.66%) interest. It means the assessee has not been compensated by the AEs for the loans given to them. Since the interest on loan is not received by the assessee at the rate of 3M EURIBOR + 3.5% p.a the transaction cannot be considered at arm's length. The assessee has charged interest @9% for the loan given to one of the related company i.e. Windbolt GmbH, Germany, which is a joint venture. The assessee also given toits own subsidiaries which are also in Germany without any interest (waived). So the interest rate @9% can be considered as internal CUP. further, The assessee has not replied to the specific query that why interest charged to the joint venture company located in Germany should not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ilable with the assessee and gave certain direction [refer order for AY 2010-11]. Therefore, according to him, for the year under consideration also the issue of disallowance of interest may be remitted back to the file of the AO with similar directions. 3.2 Per contra, the Ld.DR submitted that interest should be charged on the amount advanced by the assessee to its AE's at Germany; and since, the assessee has charged @9% from a joint venture, the AO rightly charged interest @9% rate of interest on the loan advanced to other three AEs. Therefore, he does not want us to interfere with the order of the DRP/TPO/AO. In his rejoinder, the Ld.AR pointed out that the company from whom assessee charged interest @9% was a joint-venture and formed for execution of a new project and therefore, there was more risk involved in the said project and therefore, interest was charged at the rate of 9%. Therefore, according to the Ld.AR, the same treatment cannot be given to transactions with that of wholly owned subsidiaries. 3.3 We have heard both the parties and perused the material available on record. We note that the assessee company had waived interest on loans to its wholly owned two su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t in the case of Everest Kanto Cylinder Ltd. v. ACIT (LTU) reported in [2014] 52 taxmann.com 395 (Bom.) & 378 ITR 57 and directed that AO to restrict the disallowance at 0.5% of the guarantee value. 4.2 After hearing both the parties and going through the facts and circumstances of the case, we concur with the TPO's order that this is an international transaction, but upward adjustment is now covered in favour of the assessee by the decision of Hon'ble jurisdictional High Court in the case of Redington (India) Ltd. (supra) and the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd, supra, therefore, we direct the AO to restrict adjustment @0.5% of the guarantee value. 5. Ground Nos.3 to 3.3 relates to issue of disallowance of software expenses as revenue expenditure amounting to Rs.1,20,55,431/-. 5.1 At the outset, the Ld.AR of the assessee brought to our notice that similar issue had come up before this Tribunal in the assessee's own case for AY 2011-12 and the Tribunal was pleased to set aside the matter back to the file of the AO by observing as under: "13. We have considered the rival submissions on either side and perused the relevant materia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....after decide the issue. This Tribunal found that if the application software is only for a short period, then it can be treated as revenue expenditure. However, if the application software is for a longer period, then it will have enduring benefit, therefore, it has to be capitalized. Since the facts need to be verified. This Tribunal is of the considered opinion that the matter can be verified by the Assessing Officer. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to verify the nature of expenditure and thereafter decide the issue in accordance with law after giving a reasonable opportunity to the assessee. 5.3 In the light of the above orders of the Tribunal in the assessee's own case as well as in AY 2013-14, we note that the assessee's case as far as total software expenditure in this year is concerned is noted to be on account of annual- licence fee, which issue was set aside back to the file of the AO to verify the nature of expenditure as observed (supra); therefore, respectfully following the same, we set-aside the impugned order on this issue back to the file of the AO to verify the nature of expenditure as observed....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... consider whether the premium paid for grant of leasehold rights is eligible for depreciation after hearing the assessee. 7. Ground Nos.5.1 to 5.3 relates to issue of claim of foreign exchange fluctuation loss amounting to Rs.73,38,050/-. The assessee claimed foreign exchange fluctuation loss of Rs.86.33 lakhs; and the AO asked the assessee to explain the claim; and the assessee submitted that the transaction in question pertains to foreign currency loan taken towards acquisition of fixed assets. According to assessee, since loan was taken for acquisition of fixed assets which were "indigenous assets" the foreign exchange fluctuation on the same is allowable. However, the AO didn't agree and cited the decision of the Hon'ble Supreme Court in the case of ACIT v. M/s.Elecon Engineering Co. Ltd., reported in [2010] 322 ITR 20 (SC), and was of the opinion that assessee is only eligible for depreciation on such assets @15% being Plant & Building and allowed a sum of Rs.12,94,950/- and the balance amount of Rs.73,38,050/- was added back to the total income of the assessee. The DRP confirmed the same. The Ld.AR of the assessee submitted that the AO failed to appreciate that section 43A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of repayment. * In this case, the forex loss of Rs.452.47L on actual repayment of loan taken for purchasing domestic assets is a revenue item and not a capital item covered u/S 43A and is thus allowable u/S 37 as a deduction under IT Act. * This was upheld in Wipro Finance SC which was referred to in Alchymars(para of 7 of the Order in running page 44 of paperbook-2) the ITAT held as follows: "We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purpose of fixed assets all of which were purchased from the domestic market i.e., domestic assets. The assessee did not use the loan for purchase of assets from abroad. Accordingly, fluctuation in the exchange rate viz-a-viz the rate at which loans were available, the transactional gain or loss is to be assessed as Revenue. Respectfully following the decision of Hon'ble Supreme Court in the case of Wipro Finance Ltd., supra, we allow the claim of assessee." * The Pune ITAT in Cooper Corporation (P) Ltd Vs DC....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....37,08,705/- being loss incurred in foreign currency exchange fluctuation on account ECB loss on the ground that it is capital in nature. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the borrowings were for the purpose of business and hence cost relating thereof is an allowable deduction. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that only in respect of transactions to which Section 43A applies, foreign exchange loss or gains should be adjusted against the cost of the assets. In respect of other transactions, the forex loss should be allowed as a revenue expenditure. 4. Brief facts are that the assessee is engaged in the business of manufacture and sale of API and bulk drug intermediates. The AO during the course of assessment proceedings noticed that the assessee had claimed loss of Rs.37,08,705/- arising out of foreign exchange fluctuation in respect of foreign loss obtained by assessee. The AO disallowed the loss claimed on the ground that the amounts were utilized for acquisition of assets and hence, capital in nature. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after consi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of no avail to the fact situation of the present case. For, we have already noticed that the appellant had not acquired any asset from any country outside India for the purpose of his business. 13. In view of the above, this appeal ought to succeed. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order accordingly. The ld.counsel for the assessee also relied on the decision of Coordinate Bench of Pune, in the case of Cooper Corporation (P) Ltd., vs. DCIT, in ITA No.866/PN/2014 and Chennai Bench in the case of TVS Motor Co. Ltd., in ITA No.1153/Mds/2016 & 1183/Mds./2016. 6. When these were pointed out to ld. Senior DR, he only relied on the assessment order and that of the CIT(A). 7. We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laim. 8.3 According to the Ld.AR the AO/DRP erred in disallowing the claim made by the assessee on re-statement of foreign currency loan taken towards acquisition of indigenous assets and pointed out that this issue is no longer res integra, as held by the Hon'ble Supreme Court in the case of CIT v. Woodward Governor 312 ITR 254, wherein, it was held as under: "17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard ("AS"). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... v. CIT reported in 116 ITR 1 this Court has observed 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) 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) 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 it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 9.2 At the outset, the Ld.AR brought to our notice that similar issue had come up before this Tribunal in the assessee's own case in ITA Nos.3437 & 3438/Chny/2019 for AYs 2006-07 & 2007-08 order dated 01.04.2022, wherein, it was held as under: 9. Upon perusal of material facts, it could be gathered that the loans have been advanced by the assessee to its subsidiary i.e., SFIL which is an investment arm of the assessee. M/s SFIL, as on investment company, promoted new ventures and made investments on behalf of the assessee, granted loans and acquired shares of other companies. M/s SFIL was a registered NBFC and its objects were money lending. During the year, fresh loans have been advanced to M/s Upasana Engineering Ltd. which is in the same line of business as that of assessee. A part of the loans and equity investments have been made in M/s TVS Infotech Ltd. which facilitated IT operations for the assessee. The earlier loans as granted to M/s SFZL were utilized to expand overseas market. It is also an undisputed fact that all these entities generated dividend and the assessee was benefitted by way of dividend, capital appreciation and ease of operations. Thus the test of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s were diverted for non-business proposes. Therefore, this case law differs on facts. In the present case, the loans have been advanced in furtherance of assessee's business interest and the assessee has sufficient cash generation to fund those advances. These facts have already been noted by us in the preceding paragraphs. 12. Lastly, we find that similar issue stood covered in assessee's favor by the decision of this Tribunal for AYs 2003-04 & 2005-06, ITA Nos.956/Mds/2011 & ors. order dated 15.07.2016. Nothing has been shown to us that the aforesaid order has been reversed by any judicial authority, in any manner or the ratio of the same is not applicable to the facts of this year. 13. In view of the foregoing, the impugned order would not require any interference on our part. By confirming the stand of Ld. CIT(A), we dismiss the appeal. Appeal for AY 2007-08 14. It is undisputed position that similar are the facts in AY 2007-08. The Ld. AO has repeated interest disallowance of Rs.230.92 Lacs on similar reasoning. However, the Ld. CIT(A), on similar findings, has deleted the additions. Aggrieved, the revenue is in further appeal before us. 15.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y. 12. Ground No.10 relates to alleged mistake in computing interest u/s.234A amounting to Rs.3,91,583/-. In this regard, we note that AO at page 3 under Sl.No.45 of the computation sheet pertaining to final assessment order has levied interest u/s.234A to the tune of Rs.3,91,583/-. According to the assessee, interest u/s.234A is to be levied if a RoI is not furnished or RoI is furnished after the due date. In this context, assessee pointed out that company filed its RoI electronically for AY 2015-16 on 30.11.2015 i.e., on due date. It was brought to our notice that notice u/s.148 dated 25.09.2017 was received by the company on 27.09.2017 and hence, return was filed in response to notice on 26.10.2017 i.e., within 30 days from the date of service of notice. However, interest u/s.234A was computed in the assessment order as tabulated under:- Tax Payable as per assessment order Delay period (in months) Interest Interest u/s.234A (A) (B) (C) (A)*(B)*(C) 3,91,58,310 1 1% 3,91,583 12.1 Therefore, according to the Ld. AR interest u/s.234A cannot be levied. Aforesaid facts asserted by the assessee, if found to be correct, then no interest is levia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore claiming tax depreciation and investment allowance as tabled below: Amount claimed u/s. 10AA Amount to be claimed u/s. 10AA 6,92,16,009 11,45,95,653 All the facts and figures for the above are on record and only the issue of method of quantification of profits / deduction is to be determined on the basis of the decision of the Apex Court. As this is a legal issue, going to the root of the matter, the additional grounds may be admitted and decided on merits following the Hon'ble SC and Tribunal decisions supra. The Appellant relies on the following decisions for admission of additional grounds: a. CIT Vs M.K.Yashwant Singh (231 ITR 145 (Del)) b. National Thermal Power Co Ltd (229 ITR 383 (SC)) c. CIT (vs) Ashok Leyland Ltd (253 ITR 425 (Mad)) d. CIT Vs Associated Stone Industries (224 ITR 560 (SC)) In addition to the grounds of objections raised in Form 36B before the Hon'ble Tribunal, the Petitioner hereby wishes to file the following Additional grounds and it is prayed that additional grounds may be admitted and decided on merits. 13.2 Since we find that this issue was not raised by the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessment order on this score, by observing as follows: 7.2 I have carefully perused the assessment order and the submission of the appellant. It is found that during remand hearing, the appellant has not objected to the action of the AO for making disallowance u/s 35(2AB) of the Act. During appellate proceedings, the appellant stated that the claim of the appellant u/s 35(2AB) is to be allowed in full without any restriction on account of DSIR report in Form No 3CM and 3CL. The appellant relied on the decision of Hon'ble Tribunal in the case of Torrent Pharmaceuticals Ltd ( 28 CCH 781). The appellant further claimed that the expenditure was fully vouched for and was supported by documentary evidence. The DSIR has not given any reason in support of its action, it is seen that the extent of expenditure was never verified by the AO. The appellant has not noted which expenditure was not considered by the D.S.I.R. Therefore, it cannot be ascertained as to whether the expenditure are properly vouched or not, It is also not clear as to why the DSIR has not allowed the claim of expenditure of the appellant. Therefore, it is held that the decision of Hon'ble 1TAT in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....penditure incurred @ 100% of the expenditure u/s. 35(1)(iv) of the I.T. Act; that the eligible expenditure, as per the DSIR, in Form No. 3CL was lower as compared to the amount claimed by the assessee; that the DSIR had not given any reason in support of its action; that as per the DSIR Regulations, the prescribed authority would pass an order after verification of the expenditure; that the assessee had not furnished the reasons for the DSIR's action and no objection had been filed; that the ld. CIT(A) has correctly distinguished the decision of the Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd (2009) 28 CCH 781 (Ahd); that it remains undisputed that the DSIR had not given any reason in support of its action; that the extent of the expenditure was never verified by the A.O.; that the assessee also has not pointed out as to which expenditure was not considered by the DSIR; that in these facts, the ld. CIT(A) cannot be said to have faulted in holding that it cannot be ascertained as to whether the expenditure was properly vouched or not; that it is also unclear as to why the DSIR did not allow the claim of the expenditure as made by the assessee; that, therefore, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred: Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred. Explanation.--For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rules, as within subsisting (now amended w.e.f. 01.07.2016), to provide for quantification of expenditure as well. The Finance Act, 2015 as amended to sub section (3) of section 35 w.e.f. 01.04.2016, providing for furnishing of reports in the manner to be prescribed. It is, thus, w.e.f. 01.04.2016 that the provision has been made for approval of quantum of expenditure, for the first time. 11. Further still, in Pune ITAT decision in the case of Cummins India Ltd. v. Dy. CIT (2018) 96 Taxmann.com 576 (Pune-Trib.), which is a decision directly on the issue at hand, it has been held, inter alia, to the fact that though the Rules stipulate the filing of audit report before the prescribed authority by availing the deduction u/s. 35(2AB) of the Act. The provision of the Act prescribed or approved to be granted by the prescribed authority vis-à-vis the expenditure from year to year; that the amendment was brought in by the Income Tax amendment Rules w.e.f. 01.04.2016, wherein, a separate part has been inserted for certifying the amount of expenditure from year to year and the amended Form No. 3CL, thus, lays down the procedure to be followed by the prescribed authority; th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee is found correct in contending that the ld. CIT(A) has observed that the extent of the expenditure was never verified by the A.O. Thus, according to the assessee it goes to confirms that the A.O. disallowed the claim without due application of mind. This contention of the assessee is correct, as evident from the assessment order itself, wherein the ground for the disallowance was the non approval of the expenditure claimed by the DSIR. 16. On behalf of the assessee, another contention has been raised, that the ld. CIT(A) is wrong in observing that during the remand proceedings, the assessee has not objected to the action of the A.O. in making the disallowance u/s. 35(2AB). This, it has been emphasized, that the assessee had always objected to the disallowance before the A.O. as well as the ld. CIT(A). The attention in this regard has been drawn to the grounds taken by the assessee and the submissions raised by the assessee before the ld. CIT(A). It has further been submitted that in the remand proceedings, qua this issue, no enquiry whatsoever had been made by the A.O., notwithstanding the fact that the remand proceedings were proceedings where the assessee was r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come-tax Exemptions) within sixty days of its granting approval." Amendment to Rule 6(7A) w.e.f 1.7.2016 post-which it reads: "The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of the inhouse research and development facility in Part A of Room No. 3CL; (ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Income Tax Act, 1961 in Part B of Form No. 3CL." 16.4 On perusal aforesaid rules and provision of law, it can be noted that law was amended with effect from 01.07.2016 onwards, where DSIR had to quantify the expenditure incurred for in-house research & development facility. Therefore, the question is that whether this requirement of law is applicable for assessee in the year under consideration i.e., AY 2016-17, since the Rule came into force from 01.07.2016 onwards. 16.5 It is trite law that the law which would apply to assessment year is the law prevailing on 1st day of April, which means in this case, the law which was in operation prior to amendment i.e., un-ame....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cannot have application in respect of Assessment Year 2002-03 which is the year under consideration in this case."(emphasis supplied). 16.6 Thus, for the relevant year under consideration i.e., AY 2016-17 i.e., F.Y 2015-16, the prescribed authority (DSIR) was not required to quantify the expenditure for events taking place before 30.06.2016 and it was only w.e.f 01.07.2016 (AY 2017-18) it is mandated to do so. Therefore, the assessee's contention that non-approval of expenditure to the tune of balance amount of Rs.7,33,404/- claimed by the DSIR could not have entitled the assessee to make the claim and the AO ought to have disallowed Rs.7,33,404/- and therefore, we are unable to accept action of the AO/DRP and direct the AO to allow deduction of Rs.7,33,404/- on the same ratio held for AY 2013-14, wherein this Tribunal has held as under:- "4.3 We note that the assessee has claimed deduction of Rs.14,20,60,668/- and the AO allowed deduction of only Rs.13,52,44,00/- as approved by the DSIR. It is noted that prior to the amendment brought in Rule 6(7A) of the Income Tax Rules, 1962 (hereinafter in short 'the Rules') w.e.f. 01.07.2016 i.e. from AY 2016-17, the prescribed au....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sfied with the assessee's explanation as to the expenses incurred for earning exempt income, he applied Rule 8D and disallowed Rs.76,66,627/- by holding as under:- Rule 8D Amount (in Rs.) Rule 8D(i)-The expense attributed by the assessee directly - Rule8D(ii)=A*B/C 37,69,465 Rule8D(iii)=0.5%*B 38,97,162 Total disallowance u/s. 14Ar.w.Rule8D 76,66,627 - - Total Interest paid not attributable to any particular receipt (A) 10,23,60,829 Investment opening Balance 1,13,92,75,000 Investment closing Balance 41,95,90,000 Total of opening and Closing Balance 1,55,88,65,000 Average Investment(B) 77,94,32,500 Opening Asset Balance 20,38,18,82,000 Closing Asset balance 21,94,95,18,000 Total of opening and Closing asset 42,33,14,00,000 Average Value of Assets(C) 21,16,57,00,000 Disallowance as per Workings of Rule 8D 76,66,627 14AdisallowanceadmittedbyAssessee - Disallowance u/s. 14A 76,66,627 18.2 The DRP confirmed it. Assailing the action of the AO/DRP, the Ld.AR submitted that no disallowance under Rule 8D(ii) should be resorted to, because investments ....