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M/s Garware Polyester Limited Versus Dy. CIT- 8 (1) , Mumbai

Waiver of principal amount of loan - taxable in this year either u/s 28(iv) or u/s 41(1) - Held that:- If the loan amount have taken for the purpose of acquisition of capital asset, then it remains in the capital field even at the time of remission and such a capital receipt cannot be taxed wither u/s 28(iv) or u/s 41(1). Accordingly, the order of the ld. CIT(A) is reversed and the grounds raised by the assessee are allowed. - I.T.A. No. 6169/Mum/2011, I.T.A. No. 6541 - Dated:- 18-1-2017 - SHRI .....

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007-08. 2. First, we will take up assessee s appeal in ITA No. 6169/Mum/2011, wherein the assessee has raised various grounds of appeal for challenging the following issues:- (i) Transfer Pricing Adjustment of ₹ 1,34,84,283/- on account of international transactions of sale of Polyester film products to AEs (ground no. 1). (ii) Addition of ₹ 3,52,78,000/- made u/s 28(iv) r.w.s. 41(1) on account of waiver of principal loan stated to be for acquisition of capital asset and hence capita .....

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rounds are treated as dismissed as not pressed. 4. Regarding transfer pricing adjustment, the ld. Counsel submitted that the transaction in dispute on which the T.P adjustment has been made is on account of sale of Polyester film products to its Associated Enterprises (AE); Global Pet Films Inc. and Garware Polyester International Ltd. , a US and UK based company respectively. The assessee has benchmarked the said transaction by applying CUP method wherein average price charged by the AE were co .....

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s selling on the other hand. However, such geographical differences are taken care when multiple country non-AE sales are considered. Based on the aforesaid, the TPO proceeded to compare the product, quality-wise, average non-AE export price where the price charged to AE, GPF (US) and GPIL (UK) and thereby computed the transfer pricing adjustment at ₹ 2,76,45,771/-. In the first appeal, the ld. CIT(A) confirmed the action of the A.O., however, gave the benefit of (+/-) 5% as standard deduc .....

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., also admitted that the TP issue involved in this year as well as in the earlier year are exactly same and in the earlier year the Tribunal has set aside this matter back to the file of the TPO/AO for fresh analysis. 7. After considering the aforesaid submissions and on perusal of the impugned order as well as the Tribunal order for assessment year 2005-06 in ITA No. 4444/Mum/2011 (order dated 19-12-2012), we find that the Tribunal has discussed this issue in detail after observing and holding .....

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ar East, Russia and other CIS countries, which are mostly developing markets and secondly, through two subsidiary companies which are termed as "A.E" and are operating in American and European markets which are developed markets. The assessee has bench marked its international transactions with its A.Es by applying CUP method, wherein average price charged to A.Es have been compared with the average export prices charged to local customers in India. The TPO has rejected the assessee .....

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country and specifically in a developed market of U.S. and U.K. in comparison to Asian and African countries. He analysed the prices and also the nature of market which has been advertum discussed in detail in the foregoing paragraphs. However, after having come to the conclusion that the TPO's approach is not correct and he has not taken into account the vital factor of geographical, economical market differences, held that even the assessee's approach is also not acceptable as the geog .....

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arket prices prevailing in the concerned geographical countries i.e., U.S.A. and Europe has to be seen subject to certain adjustment of expenses. The sale prices charged to such third party unrelated customers represents comparable un-control prices on aggregate basis in the respective comparable market under comparable circumstances. He even went to analyse the profit ratio and operating expenses of the A.Es and held that these A.Es are running into losses and no third party will carry such bus .....

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rnal comparables or any external comparables. In the present case, once he has held that there are no internal comparables, he was required to look into external comparables operating or dealing with the similar products under similar terms in a similar market conditions where these A.Es are operating, which he failed to do so and simply accepted the trading results of the A.Es. Under the CUP method, the price of the goods or services is directly compared with the price in uncontrolled transacti .....

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or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors. 19. Once the learned Commissioner (Appeals) found that there are so much of variables for applying either internal CUPs and has not applied external CUP, probably, due to this factor, then the entire application of CUP fails in this case. The learned Commissioner (Appeals) cannot go to examine, independently the operating expenditure and operating profits of th .....

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been spelt out. Sub-section (2) of section 92C provides that the most appropriate method referred to in sub- section (1) shall be applied for determination of ALP. Thus, for computation on examining of ALP, one of the most appropriate methods has to be applied. Once the CUP method fails in this case, then it was required by the learned Commissioner (Appeals) to look into for other appropriate methods. Now, the question is what should be the most appropriate method. At the time of hearing, both t .....

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LP after adopting TNMM and carry out fresh comparability analysis. The assessee will provide all the necessary information and search analysis for the comparables. The TPO will also provide due and effective opportunity of hearing to the assessee to represent its case. Accordingly, ground No. l is treated as allowed for statistical purposes. This decision has been further followed by the Tribunal in the case of the assessee in the A.Y. 2006-07 in ITA No. 7820/Mum/2010 (order dated 19-12-2012). T .....

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the assessee on its sale transaction with the AE. Accordingly, ground No. 1 is treated as allowed for statistical purpose. 8. Coming to the issue of addition of ₹ 3,52,78,000/- as raised in ground No. 2, the relevant facts qua this issue are that, the assessee company had availed financial assistance of ₹ 125 crores from IDBI Bank during the financial year 1996-97 for setting up a continuous poly-condensation facility at Aurangabad and also for expansion of company s polyester firm .....

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of OTS agreement, the assessee company was made to pay lump-sum amount of ₹ 7 crores against the total amount due of ₹ 12,81,12,110/- as on 31st March, 2006. The total waiver of ₹ 5,81,12,110 was bifurcated into; principal amount of loan of ₹ 3,52,78,000/-; and on account of interest payable at ₹ 2,28,33,410/-. The waiver of principal amount of ₹ 3,52,78,000/- was transferred to capital reserve . The assessee treated the said amount as capital receipt as the .....

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(1), strong reliance was placed on the decision of Hon ble Bombay High Court in the case of Mahindra & Mahindra v. CIT reported in 261 ITR 501. When the A.O. confronted with another decision of Hon ble Bombay High Court in the case of Solid Containers Limited reported in 308 ITR 417, the assessee submitted that the same is not applicable on the facts of the present case, because in that case the assessee has taken a loan as a trading receipt and the same was credited to the P&L account a .....

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within the meaning of section 28(iv) r.w.s. 41(1). Strong reliance was placed on the decision of Hon ble Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. reported in 212 ITR 344 (SC). The A.O. also noted that the assessee has credited waiver of interest liability to the P&L account, however, had not credited the waiver amount in P&L account and instead has credited the same to the General reserve account. The A.O. held that such treatment in the account will not change the .....

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t of waiver of principal loan amount of ₹ 3,52,78,700/-. On first appeal, the ld. CIT(A) confirmed the action of the A.O, however, he made certain observation in para No. 20, 21 & 26 of his appellate order which for sake of ready reference are reproduced hereunder:- 20:- It is the facts emanating from the case of' the appellant and pointed above that the VRFL loan taken by the appellant from the Vijaya Bank is for the purpose of pro rata reduction in the Rupee Term Loan liability w .....

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n from the Vijaya Bank can only be considered to be have been utilized. Accordingly, the loan so taken from Vijaya Bank is clearly towards the expenditure by way of interest and depreciation charged to P&L a/c which has been made I incurred by the appellant and subsequently by way of one time settlement, the liability to the extent of ₹ 5,81,12,110/- has ceased by way of remission thereof, which constituted or ₹ 3,52,78,000 as principal and ₹ 2,28,33,410 towards interest. 2 .....

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. the principle annunciated in the case of Mahindra & Mahindra Ltd. has been upheld. It has been held that for attracting the provision of section 4I (l), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred by it and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of .....

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e reading of the above observations of the ld. CIT(A), it is seen that the ld. CIT(A) has decided the issue on the footing that the waiver of loan procured from Vijaya Bank pertains to the portion of loan which was procured by the assessee company towards the payment of interest amount on IDBI Term Loan. He has further distinguished the decision of Mahindra & Mahindra. 10. Before us, the ld. Counsel after explaining the entire facts as discussed above submitted that, firstly, the ld. CIT(A) .....

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; 12,450 lacs Date of receipt of Vijaya Bank Loan - 26.03.1998:- ₹ 1,750 lacs Repayment of Vijaya Bank loan Amount (Rs. in lacs) Amount (Rs. in lacs Amount of loan taken from Vijaya Bank 1,750.00 Payment of interest on IDBI accrued till 31.12.1997 (549.95) Interest accrued for 3 months @ 19% (16% + 3%) from 31.12.1997 to 31.03.1998 on 9950 lakhs. (472.63) 1,022.58 Balance amount of Vijaya Bank Term Loan utilized to pay off IDBI Term Loan Principal 727.43 Thereafter, the ld. Counsel drew ou .....

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99.50 crores, then the balance amount of Vijaya Bank term loan which has utilized to pay IDBI principal amount of term loan would come to ₹ 7.27 crores. Here, the assessee had credited the principal loan amount of ₹ 3.52 crores only, which is much below the principal amount of term loan payable to IDBI. Thus, the ld. Counsel submitted that the observation of the ld. CIT(A) cannot be held to correct. 11. The ld. Counsel further pointed out that the decision of Hon ble Bombay High Cour .....

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s a clear cut finding that the amount which was written off pertained to the amount payable to the customers which was credited to the P&L account and, hence, it was clearly a trading liability. He pointed out that in a subsequent decision by the Hon ble Bombay High Court in the case of Softworks Computers Pvt. Ltd., reported in 354 ITR 16 considered the proposition laid down by the Hon ble Court in the case of Mahindra & Mahindra as well as Solid Containers Limited (supra). Their Lordsh .....

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n by the Hon ble Madras High Court in the case of CIT vs. Subramaniyam Homes Pvt. Ltd. in Tax Case (Appeal) No. 278 of 2014 order dated 22.4.2016 would apply, wherein the Hon ble High Court after considering the decision of Hon ble Bombay High Court in the case of Mahindra & Mahindra and other decision of Hon ble Delhi High Court held that they are not in agreement with these judgments. This decision is primarily based on the decision of Hon ble Apex Court in the case of T.V. Sundaram Iyenga .....

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mbay High Court. 14. We have carefully considered the rival submissions and also perused the relevant material placed on record including the judicial decisions cited by both the parties. It is an undisputed fact that the assessee have availed term loan from IDBI Bank for a sum of ₹ 125 crores for acquisition of capital assets and setting up of manufacturing plant. Such nature of loan was primarily on capital account. Later on, the assessee in the financial year 1997-98 had taken loan from .....

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loan under OTS agreement was ₹ 5.81 crores after the assessee had made the lump-sum payment of ₹ 7 crores as against the outstanding amount of ₹ 12.81 crores. This amount of ₹ 5.81 crores has been stated to be partly out of principal amount of loan of ₹ 3,52,78,000/- and partly on account of interest payable of ₹ 2,28,33,410/-. Since the A.O. has not made any addition on account of interest amount, because the same has been disallowed in the earlier years u/s .....

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as income in the hands of the assessee unless it is a trading liability and if the waiver of a loan is on capital account then certainly it cannot be reckoned as income or revenue, which is clearly evident from the relevant provisions of section 41 (1) which reads as under: "(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and .....

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, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; ……………." From the plain reading of above section it is quite ostensible that before this section can be invoked it is sine-qua-non that assessee should establish that first of all an allowance or deduction has been granted during the course of assessment for any year in respect of, (i) loss; (ii) expenditure; or (iii) tradin .....

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essment for an earlier year. Assessee s liability on account of the principal amount of loan borrowed on a capital account, i.e., for acquisition of a capital asset cannot be reckoned as a nature of trading liability as envisaged in section 41(1), therefore, its remission cannot be deemed as income under the said provision. Here, in this case admittedly the pre-requisite condition for invoking the provision of section 41 (1) has not been satisfied / fulfilled at all for the reason that the pre-c .....

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rs in the course of carrying on its business which was originally treated as capital receipts. Since these credit balances standing in favour of assessee s customers, were not claimed by the customers, the assessee transferred such amount to its P&L account. In this context the Hon ble Court held that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amou .....

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et and the cases where it has been for trading purpose; the former cannot be reckoned as revenue receipt whereas later can. This aspect of the matter has been clarified by the Hon ble Bombay High Court in the case of Mahindra & Mahindra vs. CIT reported in 261 ITR 501. The relevant observation, for the sake of ready reference, is reproduced below:- The income which can be taxed under Section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. S .....

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which is required to be borne in mind is that there was no deduction given to the assessee in earlier years and, therefore, ₹ 57,74,064 could not be included as income under Section 41(1) of the Act. Lastly, it is important to bear in mind that the tooling constituted capital asset and not stock-in-trade. Therefore, taking into account all the above facts, Section 41 (1) of the Act is not applicable". Moreover, the Hon ble Bombay High Court in the subsequent decision in the case of C .....

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ital assets unlike in the case of Solid Containers Ltd. (supra) where waiver was of a loan taken for trading activity and thus considered to be of a revenue nature. In the present case, the amount which was advanced as a loan to the respondent-assessee was for the purposes of relocating its office premises. The loan taken was utilized for the purposes of acquiring a office at Godrej Soap Complex, Vikroli, Mumbai. Therefore, the loan in the present fact was taken for acquisition of capital asset .....

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