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2016 (9) TMI 1070 - ITAT CHENNAI

2016 (9) TMI 1070 - ITAT CHENNAI - [2016] 50 ITR (Trib) 1 - Treatment of foreign exchange gains earned on cancellation of forward contracts - revenue receipt or capital receipt - Held that:- The fact remains that the forward contract was taken to insulate / protect the assessee from the possible loss that may be suffered due to foreign exchange fluctuation in the course of purchasing of plant and machinery. It is not in dispute that the plant and machinery which was proposed to be purchased for .....

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to be treated as capital in nature. Merely because the assessee suspended the setting up of plant in Tamil Nadu and cancelled forward contract, that cannot be a reason to treat the gain arising on account of cancellation of forward contract as revenue receipt. Since the transaction was relatable to acquisition of capital asset, namely, plant and machinery by way of import from Japan, this Tribunal is of the considered opinion that the gain due to foreign exchange fluctuation would definitely be .....

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mputing the tax payable by the Assessing Officer. Under normal circumstances, income-tax has to be paid on the assessed income. However, the Income-tax Act provides for payment of tax on income in advance before assessment of total income. When the assessee pays the tax in advance as per the scheme of Income-tax Act, this Tribunal is of the considered opinion that the Assessing Officer has to necessarily give credit to the advance tax paid by the assessee. Accordingly, the orders of the lower au .....

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al that a sum of ₹ 54,61,897/- was paid as advance tax, however, the same was not given credit. While considering the failure of the Assessing Officer to give credit to the advance tax to the extent of ₹ 54,61,897/-, this Tribunal finds that the matter needs to be verified and the credit should be given if the assessee paid advance tax. Since the interest is levied for non-payment of advance tax and the assessee claims that the advance tax paid was not given credit, this Tribunal is .....

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n Panel while determining the arm's length price - comparability - Held that:- Functional similarity is one of the relevant factors for the purpose of comparing the assessee’s transaction with that of transaction of comparable company. If the transaction of the assessee-company with its associate enterprise is totally different from comparable companies, then the same cannot be compared instantly for the purpose of determining the arm's length price. This Tribunal is of the considered opinion th .....

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e Transfer Pricing Officer. Accordingly, the orders of the authorities below are set aside and the issue of transfer pricing adjustment is remitted back to the file of Assessing Officer. The Assessing Officer shall refer the matter once again to the Transfer Pricing Officer. The Transfer Pricing Officer shall find out the companies which are performing same or similar functions as that of the assessee-company and thereafter decide the issue in accordance with law after giving a reasonable opport .....

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f the assessee is directed against the order of the Assessing Officer consequent to the direction of Dispute Resolution Panel for the assessment year 2009-10. 2. The first issue arises for consideration is treatment of foreign exchange gains earned on cancellation of forward contracts. 3. Shri Sriram Seshadri, the Ld. representative for the assessee, submitted that the assessee-company set up an automobile manufacturing plant in the State of Tamil Nadu. In the course of setting up of plant, the .....

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ant, the original forward contracts were cancelled. Due to cancellation for forward contracts, the assesseecompany earned net foreign exchange gain of ₹ 25,82,81,725/- which was classified as income from other sources in the financial statements. The Ld. representative further submitted that since the foreign exchange gain was earned in the course of import of capital asset, namely, plant and machinery, the same was considered as capital receipt and not offered for taxation. According to t .....

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course of its business activity. The Ld. representative further submitted that had the plant and machinery was installed, the gain arising out of foreign exchange fluctuation would definitely go to reduce the cost of the plant and machinery. Therefore, the gain arising out of foreign exchange fluctuation is not liable for taxation. Referring to the judgment of Apex Court in CIT v. Tata Locomotive and Engineering Co. Ltd. (1966) 60 ITR 405, the Ld. representative submitted that the Dispute Resol .....

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ative, submitted that had the assessee imported plant and machinery, the gain due to foreign exchange fluctuation may go to reduce the cost of the plant and machinery. In the case before us, admittedly, the assessee has not imported any plant and machinery, therefore, there is no question of increasing or decreasing the cost of asset due to foreign exchange fluctuation. According to the Ld. D.R., foreign exchange gain in forward contract is a reality which cannot be associated with assets which .....

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cess of setting up a plant in the State of Tamil Nadu. In order to protect the assessee from foreign exchange fluctuation with regard to import of capital goods, namely plant and machinery, from Japan, the assessee entered into forward contract with BNP Paribas. Subsequently, the assessee suspended the setting up of plant in the State and forward contract was consequently cancelled. The assessee admittedly earned foreign exchange gain to the extent of ₹ 25,82,81,725/-. The assessee claims .....

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eafter, the assessee found it more expensive to buy American goods as Government of India imposed some restrictions on imports from USA. The assessee with the permission of Reserve Bank of India repatriated $ 49,500. This resulted in surplus and the Assessing Officer assessed the same as profit arising in the course of business activity. However, this Tribunal found that part of the surplus to the extent of $ 36,123 was from trading profit. On a reference, the Apex Court found that the surplus t .....

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ge fluctuation, whether the same would be classified as revenue receipt or capital receipt? The fact remains that the forward contract was taken to insulate / protect the assessee from the possible loss that may be suffered due to foreign exchange fluctuation in the course of purchasing of plant and machinery. It is not in dispute that the plant and machinery which was proposed to be purchased for the purpose of setting up of plant in the State of Tamil Nadu, which is a capital asset. When the a .....

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n Tamil Nadu and cancelled forward contract, that cannot be a reason to treat the gain arising on account of cancellation of forward contract as revenue receipt. Since the transaction was relatable to acquisition of capital asset, namely, plant and machinery by way of import from Japan, this Tribunal is of the considered opinion that the gain due to foreign exchange fluctuation would definitely be on the capital field. Therefore, this Tribunal is unable to uphold the order of the Assessing Offic .....

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o the extent of ₹ 54,61,897/-, which was not given credit by the Assessing Officer. 11. On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that if the assessee declared income for the assessment year under consideration corresponding to the advance tax paid, the Assessing Officer would have given the credit. However, it is not known whether the assessee has declared the corresponding income in the return. If the return does not contain the details of income .....

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es for payment of tax on income in advance before assessment of total income. When the assessee pays the tax in advance as per the scheme of Income-tax Act, this Tribunal is of the considered opinion that the Assessing Officer has to necessarily give credit to the advance tax paid by the assessee. Accordingly, the orders of the lower authorities are set aside and the issue of advance tax credit to the extent of ₹ 54,61,897/- is remitted back to the file of the Assessing Officer. The Assess .....

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ed interest on the assessed income and not on the returned income. 15. On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that Section 234C of the Act provides for interest for non-payment of advance tax within the time prescribed. Referring to Section 234C of the Act, the Ld. D.R. submitted that the assessee has to pay the advance tax as per the scheme framed in Section 234C of the Act. In the absence of any payment of advance tax, according to the Ld. D.R., the .....

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ance tax to the extent of ₹ 54,61,897/-, this Tribunal finds that the matter needs to be verified and the credit should be given if the assessee paid advance tax. Since the interest is levied for non-payment of advance tax and the assessee claims that the advance tax paid was not given credit, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside in respect of levy of inte .....

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tted that the assessee is engaged in the business of engineering design and drawings of motor cars, specifically catering to the Indian market. The design services are in relation to aesthetic like of the motor vehicle which covers both interior and exterior of the vehicle. The assessee selected eight comparables and determined arithmetic mean at 12.13%. However, out of the eight comparables, the Transfer Pricing Officer found six comparables selected by the assessee are not similar to the asses .....

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werage, etc. Referring to CSS Technergy Ltd., the Ld. representative submitted that the TPO found that no segmental analysis was available. The TPO has also found that CSS Technergy Ltd. provides engineering and information technology services to utilities, aerospace and healthcare. Similarly, Tata Elxsi Ltd., Vama Industries Ltd. and KLG Systel Ltd. were also rejected by the TPO on the ground that their functions are not similar to that of the assessee-company. The Dispute Resolution Panel, how .....

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e not doing similar functions, cannot be a foundation for making transfer pricing adjustment. According to the Ld. representative, without comparing the comparable companies which are performing similar functions, the DRP proceeded on the presumption of utilization of multiple year data. Unless and until the comparable companies are engaged in the business, which are similar in nature as that of assessee-company, according to the Ld. representative, the same cannot be compared with that of the a .....

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he uncontrolled transaction as not comparable. Referring to Rule 10B(4) of the Income-tax Rules, 1962, the Ld. D.R. submitted that the most appropriate data to be used shall be the data relating to the financial year in which the transaction is entered into. The TPO as well as the DRP have also referred Rule 10B and found that since no functionally similar companies are available, the TPO and DRP have to necessarily consider the multiple year data available in the public domain. Therefore, accor .....

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hall be any method which takes into account the price which has been charged or paid, or would have been charged or a specified domestic transaction or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. In view of Rule 10AB of Income-tax Rules, 1962, it is obligatory on the part of the Transfer Pricing Officer and the Dispute Resolution Panel to compare the transaction of the assesse .....

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