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DCI, Circle 11 (1) , New Delhi Versus. Ericsson India Pvt. Ltd.

Disallowance of the provision for liquidated damages - Held that:- Assessee is eligible for the deduction in respect of provision for liquidated damages as revenue expenditure allowable u/s 37(1) of the Act. - Foreign exchange fluctuation loss - Held that:- The issue relating to foreign exchange fluctuation loss is decided in favour of the assessee and against the Revenue. See CIT Vs Woodward Governor [2010 (6)65 - BOMBAY HIGH COURT]. - I.T.A. No.1927/Del/2011 - Dated:- 12-9-2016 - SHRI N. K .....

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eleting the addition of ₹ 21,92,11,000/- on account of disallowance of the provision for liquidated damages. 2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ 12,10,74,346/- on account of foreign exchange fluctuation loss. 3. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ 23,93,22,490/- for the purpose of computing the book profit u/s 115JB of the IT Act. 4. On .....

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holding company of all Ericsson Group Companies located in various countries across the globe. 2.2 During the relevant Assessment Year 2005-06 under consideration, the assessee was engaged in the business of manufacturing of electrical apparatus for line telephone or telegraphy including such apparatus for carrier current line system and parts thereof, marketing of telecommunication equipment, implementation and commissioning of telecommunication equipment meant for mobile telephony, internet s .....

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6 4 Transfer Pricing addition in pursuance of order u/s 92CA(3) of the Act 3,19,22,989 2.4 Aggrieved by the order of Ld. A.O., assessee preferred an appeal before Ld. CIT(A) Ld. CIT(A) deleted the addition on the basis of submissions made by the assessee. 2.5 Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us now. 3. At the outset, the Ld. A.R. submitted that ground No.1 to 3 raised in the Revenue s appeal stand squarely covered by the orders passed by Coordinate Benches of .....

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d of by the Customer. Hence, there is no infirmity in' method of accounting as- stated' by, the Ld. CIT(A) in its order in, respect of accounting followed by the appellant in respect of Liquidated Damages. In view of the above facts and the legal position, the claim in respect of liquidated damages is allowable as liability accrued in the year under appeal, hence allowable under section 37(1) of the Act. Assessment Year 2002-03: 20. Thus, it has been concluded by the Tribunal that liquid .....

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allowable liability during the year under consideration, hence, could not be added either under normal computation of income or while computing income u/s 115JB of the Act. These grounds raised by the assessee are allowed. Assessment Year 2003-04 & 2004-05: 25. In the assessment orders, the A.O. made disallowance of ₹ 252,679,327/- and Rs.156,071,161/- in Assessment Year 2003-04 and 2004-05 respectively, claimed as provision for liquidated damages by the assessee on the reasoning that .....

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s as revenue expenditure allowable u/s 37(1) of the Act. 4. Ground No.2 stands covered by the orders passed for Assessment Years 2002-03, 2003-04 and 2004-05. The relevant paragraphs of the said orders are as under: Assessment Year 2002-03: 23. Apropos Ground No.2; this issue is discussed by the AO in para 9 to 9.4. Total expenditure of ₹ 2,44,14,276/- was claimed by the assessee in respect of loss on account of foreign exchange fluctuation. A sum of ₹ 1 67,63,500/- as incurred on ac .....

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ward Governor (I) Pvt. Ltd. 294 I 45 wherein it has been held at increase in liability in the revenue account as a result of the fluctuation in the rate of foreign exchange is not notional or contingent and, therefore, the same is allowable as deduction. 25. On the other hand, Ld. DR relied on the order of the AO and pleaded that the order of the CIT (A) on this issue should be set aside and that of the AO be restored. 26. We have carefully considered the rival submissions in the light of the ma .....

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n the judgement of Hon'ble Supreme Court which were referred to before Hon'ble High Court and the submission of Revenue was rejected that in the revenue account cases, the increase in liability on account of fluctuation in the foreign exchange prevailing on the last day of the financial year is notional or contingent and cannot be allowed as a deduction in terms of Section 37 of the Act. It will be relevant to reproduce the following observations of their Lordships from the said decision .....

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the Hon'ble Supreme Court which we have referred to. We, therefore, reject the submission of the appellant in these appeals that in the revenue account cases, the increase in liability on account of the fluctuation in the rate of foreign exchange prevailing on the last day of the financial year is notional or contingent and. Therefore, cannot be allowed as a deduction in terms of section 37 of the Act. (iii) In the capital account cases where the cost of asset has been either paid fully or .....

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the above discussion, the substantial question of law that arises in these appeals is answered in affirmative by holding that the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year is allowable as a deduction and is not merely notional or contingent. Accordingly, the question is answered in favour of the assessee and against the revenue. 27. In this view of the situation, we find no infirmity in the order of the CI .....

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on. 32. On appeal the CIT(A) following the order of his predecessor dated 9-12-2005 passed for assessment year 2002-03, coupled with other decisions, allowed the fluctuation loss claimed by the assessee in the assessment years under consideration. 33. Before us ld. AR for the assessee submitted that the issue involved in ground no. 3 of the appeals of the Revenue relating to claims of deduction on account of foreign exchange fluctuation loss now stands squarely covered in favour of the assessee .....

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d Governor, 294 ITR 451 (Copy placed at pages 93 to 123 of this compilation of assessee.) 34. On the other hand, ld. DR for the Revenue was fair enough to concede to the above submissions of Id. AR for the assessee. 32. In this view of the matter and respectfully following the order (supra) of the Tribunal and the order of Hon'ble Delhi High Court in the case of Woodward Governor (supra) the issue relating to foreign exchange fluctuation loss is decided in favour of the assessee and against .....

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overnor reported in 294 ITR 451, the issue relating to foreign exchange fluctuation loss is decided in favour of the assessee and against the Revenue. Consequently, ground No.2 of the instant appeal of the Revenue is rejected. 5. Ground No.3 stands covered by order for Assessment Years 2003-04 and 2004-05. The relevant paragraphs are paras 41 to 43. This Tribunal has upheld the findings of Ld. CIT(A) therein. It is further observed that Ld. CIT(A), in the appeal before us has followed the order .....

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mmet System & Services, 292 ITR 299 (Del.) for the previous Assessment Year 2003-04 and 2004-05, the orders of Ld. CIT(A) in this regard are upheld and ground No.3 of the instant appeal of the Revenue is rejected. 6. Ground No.4; The Revenue has raised this ground in lieu of addition being deleted on account of transfer pricing adjustment made by the Ld. TPO to an extent of Rs.,3,19,22,989/-. Brief facts on the transfer pricing adjustment are as under: 6.1 During the year under consideration .....

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sactions entered by the assessee in each of the aforementioned business segments. 6.3 The Ld. TPO accepted the margins earned by the assessee in each of the three business segments. However, in respect of transaction pertaining to reimbursement of cost related to wireless segment by Associated Enterprise to assessee for purchase and supply of ancillary / non-core equipment such as antennas / filters to customer of EAB in India, was objected by Ld. TPO. The Ld. TPO considered the supply of equipm .....

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is in appeal before us. 6.5 Ld. D.R. submitted that cost pertaining to the purchase of ancillary equipments were reimbursed by its AE s on cost to cost basis without any markup. He submitted that such an arrangement between the assessee and its AE is not supported by any documentary evidence. He thus submitted that the TPO was correct in applying cost + 6% markup on the reimbursements made by the AE on purchase of ancillary equipments. 6.6 On the contrary, Ld. A.R. submitted that the Ld. TPO ha .....

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wireline segment, the assessee undertakes manufacture of telecommunication equipments for sale to independent customers, and also provide marketing support services to its AEs. In software segment, the assessee undertakes contract software development for its AEs. 6.8 Ld. A.R. further submitted that the assessee did not undertake any significant function or effort with respect to the said transaction. Further, the assessee does not bear any risk such as Market Risk, Product Service Risk, Credit .....

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e have perused the records placed before us and the orders passed by the authorities below. On perusal of the agreement entered between the AE and the assessee clearly shows that the later acts only as a facilitator for its AE and does not undertake any transaction on a regular basis. The main purpose of undertaking such a transaction was to achieve administrative convenience for the AE. The assessee merely acts as an intermediary or facilitator for administrative convenience of the AE. Therefor .....

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n the light of the material available on record, the main bone of contention is whether the appellant has undertaken significant functions, employed significant assets and borne significant risks with respect to the cost reimbursement transaction. 37. The claim of the appellant is that with respect to the said transaction it has not undertaken any significant functions, employed significant assets and borne significant risks with respect to the cost reimbursement transaction. To explain the same .....

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respect to the sad international transaction was the supply of ancillary telecom equipment on which it had incurred transportation cost and personal cost. However, such cost was not significant and the same has been captured in the overall cost base of the Wireless segment, which the TPO has also accepted to be at arm's length 38. In my considered view a FAR analysis forms the bedrock of any transfer pricing analysis. In the instant case the appellant by way of any FAR analysis has clearly d .....

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