TaxTMI 
TaxTMI 
2025 (7) TMI 113
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the revenue for adjudication. 3. The assessee has raised the following grounds of appeal in IT(TP)A No.: 42/CHNY/2023: 1. Legal Grounds 1(a) On the facts and circumstances of the case and in law, the order dated November 1, 2017, passed by learned Transfer Pricing Officer ('TPO') is bad in law being barred by limitation, as it is passed beyond the time limit as prescribed under Section 92CA (3A) read with Section 153 of the Act, Accordingly, the transfer pricing order dated November 1, 2017, deserves to be quashed. 2. General Grounds 1(a) The order passed by the Learned ('Ld.') Commissioner of Income Tax (Appeals)-18, ('CIT(A)') in pursuance of the grounds filed by the Appellant against order under Section 143(3) r.w.s. 92CA of the Income-Tax Act, 1961 ('the Act'), is bad in law and on facts. 1(b) The Ld.CIT(A) /Assessing Officer has erred in law and on facts by failing to record an opinion that any of the conditions in section 92C(3) of the Act were satisfied and erroneo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vatable customs duty adjustment in the Machine & Parts Segment, without appreciating the fact that the comparable companies do not bear significant additional cost of the non-cenvatable customs duty due to largely indigenized operations. 3(g) Erred in denying the claim of appellant merely on the grounds that appellant could not indigenize the manufacturing operations, thereby disregarding trite law that the AO/TPO does not have the jurisdiction to challenge the commercial wisdom of the appellant. 4. Erroneous Rejection of Economic Adjustments - Foreign Exchange Gain/ Loss 4(a) Erred in law and on facts in not excluding foreign exchange losses for the year while computing the operating margins, without appreciating that the loss on foreign exchange fluctuation was extraordinary in nature as compared to comparables, and predominantly comprises of unrealized foreign exchange fluctuation loss/gain on restatement. 4(b) Erred in disregarding the definition of Safe Harbour Rules issued by the Central Board of Direct Taxes ('CBDT') which explicitly excludes loss/ gain arising on account of foreign exchange currency fluctuations for purposes of co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Appellant undertakes routine business risks as against comparable companies that are full-fledged risk-taking entrepreneurs in the IT Segment of the Appellant The revenue has raised the following grounds of appeal in ITA No.: 717/CHNY/2023: 1. The order of the Id. Commissioner of I.T. (Appeals) is erroneous on facts of the case and in law. 2. The learned CIT(A) erred in deleting the addition of Rs. 75,70,00,000/-, - made on account of disallowance of foreign exchange fluctuation loss under the head finance cost and failed to appreciate the fact that since the ECB loan was taken by the assessee for acquisition of indigenous assets, the notional foreign exchange fluctuations loss incurred for capital purposes is not allowable, as it is not revenue in nature. 2.1 The learned CIT(A}erred in deleting the disallowance of notional loss arising out of foreign exchange loss on restatement of External Commercial borrowings, without appreciating the fact that the day to day profits of the assessee are not affected due to exchange loss fluctuation on restatement of External Commercial borrowing, and the same shall have effect only at the time o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made was on account of non deduction of TDS u/s. 195 of the IT Act on foreign reimbursements on secondment expenses of the seconded employees to the AEs and not on the issue of non deduction of TDS u/s.192 of the IT Act. 5.2 The learned CIT(A) ought to have appreciated the fact that the employees seconded to the assessee company had performed technical and managerial services in India, as such the reimbursements effected to the foreign AE's would partake the character of " fees for technical services" on which tax is liable to be withheld as per the provisions of section 195 rws 9(1)(vii) of the IT Act and the relevant DTAAs. 6. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of Id. CIT(A) may be set aside and that of the Assessing Officer be restored. 4. The brief facts of the case are that the assessee is a company and wholly owned subsidiary of Caterpillar Commercial S.A, Belgium which in turn is a wholly owned subsidiary of Caterpillar Inc. during the year the assessee has acquired Bucyrus India Pvt. Ltd. The assessee operates in 6 segments, of which the TPO ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nse while computing the margin of the Assessee and arrived at a revised margin of Assessee at -2.38%. Further, the TPO brought in additional comparable with totally 6 comparable margins with a margin of 7.46% and ultimately held that the international transaction is not at arm's length. 8. In relation to the first ground of appeal i.e. Idle Capacity adjustment, the brief facts as submitted by the Assessee is that within the Manufacturing division, the Assessee had two units viz., Material Handling Unit (MHU) and Building and Construction Products Unit (BCP). The BCP Unit is a relatively new assembly line at Thiruvallur factory (only 3rd year of operations). Both these units together achieved a capacity of only 23% of the installed capacity. Accordingly, the claim of the Assessee is that material disparities in the utilisation of capacity and the level of absorption of the fixed costs between the Assessee and the comparable companies should be eliminated. Accordingly, the Assessee has claimed that the capacity achieved in the immediately preceding two years is around 43% and therefore it has sought for considering certain fixed cost at 43%. However, the TPO did not grant this adj....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case as the decline in the capacity is mainly due to the fact that sales to AE has reduced significantly. 10. We have considered the rival contentions and also perused the material on record. In our view, the first and foremost issue to be decided is whether the reduction of AE sales can be a factor to reject idle capacity adjustment. We find that it is an undisputed fact the Appellant is a full-fledged entrepreneur bearing all risks and it is also an admitted fact that the Appellant and AE do not have any arrangement for committed no of units, that being the case merely because the sales to AE is reduced cannot be a factor to reject idle capacity adjustment. In this context the Appellant has also relied on the decision of the Bangalore ITAT in the case of Denso Kirloskar [2022] 136 taxmann.com 405 wherein it is held as under: "7. The assessee in the transfer pricing study has applied Transaction Net Margin Method (TNMM) as the most appropriate method and basis that the assessee concluded that the international transactions at arm's length price (ALP) in arriving at the operating profit margins of the assessee. While computing the ALP the assessee made certain adjus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(i.e. MHU unit) has crossed the start-up phase as it is in existence for around 7 years and in the given facts of the case admittedly there is decline in capacity in both the units but the decline in MHU unit is much more than that of the BCP Unit. In our considered view idle capacity could arise because of various reasons like start-up phase, force majeure, recession, industry/sector specific reasoning etc. and it is not restricted to start-up phase. In the instant case, the Assessee has pointed out that due to global recession there was a decline in export sales to AE, this fact is also acknowledged by the TPO and he has also given a specific finding that only AE sales in reduced but Non-AE sales was uniform. This apart the available comparable companies average capacity is as high as 62.38% and even the industry average capacity as published by RBI and FICCI is around 70% whereas the capacity achieved by Assessee is only 23%. All these factors goes to show that due to global recession there seems to be a decline in the capacity of the Assessee, which deserves to be appropriately adjusted for idle capacity. Accordingly, we hold that idle capacity adjustment is allowable. In this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ordingly, we hold in principle that forex loss should be treated as operating expense. However, whether the entire quantum of forex loss (i.e. realised/actual and unrealised/notional) should be treated as operating expense is concerned we hold it is only the actual forex translation should be considered as operating expense and we find merit in the contention of the Ld.AR. Accordingly, we hold that only actual forex loss should be treated as operating expense and the notional Forex loss should not be treated as operating expense. Accordingly this ground of appeal is partly allowed in favour of the Appellant. 14. The last ground of appeal under manufacturing segment is in relation to entity level adjustment. In this regard, the Ld.AR submitted that this ground would become academic basis our decision in the earlier grounds of appeal. Accordingly, we are not adjudicating this grounds of appeal and the TPO is at liberty to reconsider the same at the time of giving effect to this order. Software Development segment: 15. The brief facts relating to this issue is that the Appellant has adopted TNMM as most appropriate method and arrived at Assessee margin of 14.98% vis a vis 7 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uthorities is not sound enough since the TPO has not established how this has influenced the margin of the said comparable. Further, the lower authorities do not dispute that this company is functionally comparable. Accordingly, we hold that this comparable company should be included in the final list of comparable companies. 19. The Ld AR submitted that if Thirdware Solutions Ltd is excluded and Spry Resources Pvt Ltd is included then margins of the Assessee would be within the tolerance range and adjudication on other comparable inclusion/exclusion would be academic in nature. Similarly, the Ld AR has also submitted that ground no.8 would also become academic. Accordingly, we are not dealing with inclusion/exclusion of other comparable companies and on the ground of risk adjustment. 20. Since the main issue is addressed in favour of the Appellant, the other grounds of appeal i.e. ground nos 3.1 to 3.4 and 4.1 becomes academic and hence we are not adjudicating the same. In the result the appeal of the Assessee is partly allowed. ITA.No.717/Chny/2023 21. The Revenue has raised grounds of appeal in relation to the following issues: a. Disallowance of notional fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....opriate adjustments to the opening stock and closing stock have to be made by also taking into consideration the disallowance made in AY 2013-14. We find that this issue is squarely covered against the Assessee by the order of this Tribunal in Assessee's own case in ITA.No.2749/Chny/2017 dated 11.06.2024 wherein it is held that provision for old stock is not allowable as the loss could be allowed when it is actually sold. "We are of the considered opinion that mere provision of old stock could not be allowed to the assessee by way of deduction in the computation of income. The assessee would be following a definite accounting policy to value the book stocks and the profit or loss arising therefrom would accrue only at the time of sale thereof." 24. Respectfully following the same, we also hold that the provision is not allowable as deduction for AY 2014-15. Nevertheless, we find that the alternate argument of the Assessee merits consideration i.e. since the provision has been disallowed in the immediately preceding year AY 2013-14 and we have also now disallowed the same in the subject AY 2014-15, we hereby direct the AO to rework the opening stock and closing stock of ....