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Swarovski India Private Limited Versus ACIT, Circle-7 (1) , New Delhi and DCIT, Circle-7 (1) , New Delhi Versus Swarovski India Private Limited

Transfer pricing adjustment - Whether CUP is the most appropriate method ? - the assessee imported Crystal goods as well as Crystal components from its AE - Held that:- It is an admitted position that the AE did not sell any Crystal goods to its customers in India directly and only Crystal components were sold in India by the AE, which are further not meant for domestic consumption, but, to be utilized for export by such parties. The international transaction reported by the assessee is a common .....

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ons of Crystal components can be considered as a benchmark for Crystal goods as well. In such circumstances, applicability of CUP to a single combined international transaction of Import of Crystal goods and Crystal components, cannot be considered as the most appropriate method.We, therefore, countenance the view taken by the TPO in rejecting the CUP as the most appropriate method. - TNMM vs. RPM - Held that:- We find that the assessee purchased Crystal goods and Crystal components from its .....

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ecide it in the way he thinks expedient. Contention of the ld. AR that the comparables should be restricted to the ten companies which it cited before the ld. CIT(A) or twenty companies which the ld. CIT(A) suo motu chose for making TP adjustment on account of AMP expenses, cannot be accepted. We do not intend to eclipse the power of the TPO by restricting the exercise, which he has yet to undertake for the first time. It is further clarified that if due to one reason or the other as discussed a .....

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P expenses. If the existence of such an international transaction is not proved, the matter would end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon’ble High Court, after allowing a reasonable opportunity of being heard to the assessee. - Addition on account of Provision for doubtful .....

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rospectively inserting Explanation 1 to clause (vii) w.e.f. 1.4.1989 that : `For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee’. This clinches the issue and clarifies the position beyond an iota of doubt that a mere provision for doubtful debts is not deductible in the case of a non-banking assessees. We are, therefore, persuaded .....

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or doubtful advances unlike section 36(1)(vii) which provides for deduction on account of simple write off of bad debt subject to the fulfillment of conditions laid down in section 36(2), a write off of advances, falls in a separate compartment. In order to be eligible for such a deduction, the assessee is particularly required to prove the event of occurrence of loss. Unless the loss is proved to have been occurred, there can be no question of any deduction. Here is a case in which the assessee .....

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nner, it should also be ensured that there is no double deduction in view of the decision allowing deduction at the time of creation of a similar provision in relation to the A.Y. 2003-04. - Disallowance of Mediclaim personal accidental insurance policy taken for the benefit of staff members - Held that:- We are unable to concur with the view adopted by the ld. CIT(A) in sustaining the disallowance. Admittedly, insurance policy was taken by paying premium to National Insurance Company Ltd. W .....

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mium in respect of insurance policy taken for the benefit of its employees, the deduction has to be allowed. We, therefore, allow this ground of appeal. - Disallowance of depreciation on foreign exchange loss capitalized in the block of ‘Buildings.’ - Held that:- Block of assets increases with the actual cost of any asset falling within that block, acquired during the previous year. Forex gain or loss effects the cost of an asset only u/s 43A and that too w.r.t. the translation of foreign cu .....

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. AR is accepted that such increase due to forex loss is contemplated u/s 43(1) itself and there is no need to approach section 43A, then the very existence of section 43A becomes meaningless. Placement of a separate section 43A shows that increase in the actual cost due to forex loss, and that too at the time of making payment, is not permissible but for this provision, which applies only to an asset acquired from a country outside India only. As the assessee acquired Building in India, neither .....

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e judgment in CIT vs. Citi Financial Consumer Fin. Ltd. (2011 (3) TMI 622 - Delhi High Court) in which it has been held that the entire expenditure on publicity and advertisement is allowable fully in the year in which it is incurred. We, therefore, uphold the impugned order on this score. Similar view has been taken by the Tribunal in the assessee’s own case for the A.Y. 2002- 03. It is however, made clear that no further deduction for the remaining 2/3rd of the total expenditure, directed to b .....

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, Sr. DR ORDER PER R.S. SYAL, AM: These two cross appeals - one by the assessee and the other by the Revenue - arise out of the order passed by the CIT(A) on 26.07.2014 in relation to the assessment year 2004-05. There are two transfer pricing additions which have been challenged by the assessee in its appeal apart from the confirmation of certain non-transfer pricing additions. The Revenue is also aggrieved against the deletion of one non-transfer pricing addition. I. TRANSFER PRICING ADDITIONS .....

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in crystal jewellery and accessories, grinding and dressing tools, precision optical equipment and synthetic gemstones. The group has production locations in twelve countries and has sale companies in several countries in Asia, Europe, South America, USA and Canada. The assessee company was initially registered as a 100% export oriented unit for undertaking activities of coating of raw beads, polishing and knotting of crystals etc. Later on, the assessee also started imports and sale of Crystal .....

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th price (ALP) to the Transfer Pricing Officer (TPO). Reported international transactions include a transaction of Import of crystal and crystal components with transacted value of ₹ 6,64,22,297/-. Only this international transaction is under dispute. The assessee applied Comparable Uncontrolled Price (CUP) method to demonstrate that the international transaction was at ALP. In order to fortify the adoption of CUP as the most appropriate method, the assessee argued that the imports were ma .....

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ich commission @15% of invoice value was being allowed to it. The sum and substance of the assessee s submissions before the TPO was that the price charged by its AE from any other country through its group company/branch office was the same as that charged from customers in India. The TPO observed that the assessee made imports from its AE and resold the same to Indian customers. He further noticed that as against the turnover of ₹ 14.86 crore under this segment, the assessee had shown to .....

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uty rate for the assessee was in the range of 50% and it was 0% in the case of third party transactions undertaken by the AE with customers in India as such parties were using imports for further exports. That was also considered as a reason for the assessee pressing hard to import at lower prices from its AE vis-à-vis the price charged from unrelated parties in India. After rejecting the CUP as the most appropriate method, the TPO took recourse to the Transactional Net Margin Method (TNM .....

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several years for calculating the ALP. Accordingly, it was directed that only the current year s data should be used. In this manner, the issue of transfer pricing adjustment was restored. Aggrieved thereby, the assessee is in appeal before us against the adverse findings returned by the ld. CIT(A). 3. We have heard the rival submissions and perused the relevant material on record. Only the international transaction of Import of crystal and crystal components out of the reported transactions is .....

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e nature of the international transaction. This import transaction comprises of two things, namely, Crystal goods and Crystal components for which there are separate divisions, namely, CGD and CCD. Import of both the Crystal goods and Crystal components has been shown as one international transaction and there is no further segregation. The assessee s Transfer pricing study report has been placed at pages B-375 onwards of the paper book. Page B-395 clarifies that the domestic unit of the assesse .....

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our and method of application on to the garments. To cite an example, 2012SS16 Crystal MHF means that article No.2012 is of size SS16 which corresponds to a diameter of 3.80-4.00 mm. The assessee sells Crystal goods through dealers and Crystal components are sold either directly to manufacturers or dealers or to wholesalers. In order to appreciate the applicability of the CUP method, it is apt to note that Rule 10B (1)(a), which contains the modus operandi for its application, as under :- (i) th .....

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be an arm s length price in respect of the property transferred or services provided in the international transaction ; 4.2. Sub-clause (i) of Rule 10B(1)(a) provides for, inter alia, identifying the price paid for property purchased. Sub-clause (ii) talks of making adjustments to such price on account of differences, if any, between international transaction and comparable uncontrolled transactions, which could materially affect the price in the open market. Sub-clause (iii) provides that the a .....

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reby reducing the reliability of comparability. However, in order to successfully apply this method, it is sine qua non that the goods purchased or sold must be compared with similar goods. Thus, the fundamental thing is that the goods in an international transaction must be similar to those in comparable uncontrolled transaction if a valid comparison is to be made. Of course, some adjustments can be made for bringing a similar product to the rank of an identical product, which is subject matter .....

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under sub-clause (ii), but in no case an apple in an international transaction can be compared with an orange, both of which are materially different from each other. 4.3. Adverting to the facts of the instant case, we find that the assessee imported Crystal goods as well as Crystal components from its AE. Apart from mentioning that CUP was the most appropriate method, the assessee did not identify any comparable in its Transfer pricing study report. However, during the course of assessment pro .....

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bles given by the assessee during the course of TP proceedings were only of Crystal components and none related to Crystal goods. As a matter of fact, it is an admitted position that the AE did not sell any Crystal goods to its customers in India directly and only Crystal components were sold in India by the AE, which are further not meant for domestic consumption, but, to be utilized for export by such parties. The international transaction reported by the assessee is a common pool of both the .....

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ponents can be considered as a benchmark for Crystal goods as well. In such circumstances, applicability of CUP to a single combined international transaction of Import of Crystal goods and Crystal components, cannot be considered as the most appropriate method. 4.4. However, the other view point of the TPO, as accentuated by the ld. DR, that the unrelated parties made purchases of Crystal components for export and hence no customs duty was payable went on to prove that the assessee s purchases .....

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rather support the case of the assessee. If the assessee is bargaining hard and making cheap purchases from its AE in comparison with the price paid by the non-AEs, that will lead to the resultant higher profit to the assessee, if other things are equal. Transfer pricing adjustment under CUP method is called for when the comparable price in the uncontrolled transactions is less than that paid by the assessee and not vice versa. In our considered opinion, this factor raked up by the TPO has no b .....

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LP of the international transaction. In doing so, he observed that the assessee is dealing in the products which are unique in nature and there are no reliable comparables available in the databases used in India, namely, Prowess and Capita Line. He, therefore, expanded the search process beyond the territory of India. Using ORBIS database, firstly, he considered data of two companies of the assessee group, namely, Swarovski, South Korea and Swarovski, Singapore. The TPO has tabulated snapshot o .....

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85,282 954,396 Cash Flow 2,264,028 1,977,898 299,564 1,589,348 Total Assets 12,627,944 12,053,465 9,523,353 7,896,459 Shareholders Funds 3,375,307 2,141,323 1,093,512 1,578,794 Current Ratio (x) 1.65 2.19 1.47 1.85 Profit Margin (%) 4.77 4.8 -1.83 8.36 Return on shareholders Funds (%) 49.01 69.03 -43.01 87.5 Return on capital Employed (%) 30.58 23.11 -4 33.29 Solvency Ratio (%) 26.73 17.76 11.48 19.99 5.3. The TPO mentioned below the table that Swarovski, Korea made a gross profit margin in the .....

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over 48,036 38,247 33,149 31,576 25,356 P/L before tax 2,707 2,479 2,401 3,325 1,752 P/L for Period [=Net Income] 2,041 1,868 1,832 2,502 1,245 Cash Flow 2,823 n.a 2,443 n.a 1,726 Total Assets 17,546 16,404 15,867 16,014 14,516 Shareholders Funds 11,485 11,444 11,576 11,528 9,025 Current Ratio (x) 2.04 2.36 2.78 2.76 2.05 Profit Margin (%) 5.64 6.48 7.24 10.53 6.91 Return on shareholders Funds (%) 23.57 21.66 20.74 28.84 19.41 5.5. After mentioning profit margin below the table at net level of 5 .....

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are foreign unrelated entities, except one at Sl. no.6, namely, Swarovski Singapore Trading Pte Ltd. Profit margin of these 20 companies was worked out at 4.185%, which the TPO found to be in the same range as earned by Swarovski, South Korea and Swarovski, Singapore. He, thus, held that 4.185% was arm s length margin for the assessee company. A further adjustment of 5% on such arm s length margin was given on account of geographical region and market size, etc., thus, working out arm s length .....

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computed transfer pricing adjustment of ₹ 3.74 crore. In para 8.5, he discussed that the amount of adjustment is different in the Primary and Secondary analysis, namely, by applying net and gross level margins. Eventually, he averaged the amount of adjustment computed under both the methods for proposing a final transfer pricing adjustment of ₹ 4,72,74,425/-. This is the amount of addition made by the AO. 5.8. The ld. AR contended that the TPO was wholly unjustified in, firstly, cho .....

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is not deducible. Even the ld. DR could not point out how these percentages were computed. Similar is the position qua the working of margin of Swarovski, Singapore. The TPO referred to profit margin at net level of 5.64% as on 31.12.2003. It can be seen from the Table drawn by the TPO as reproduced above that the rate of 5.64% is not emerging. Position regarding the margins of this company referred by the TPO at gross level of 54% and net of 5%, is also no different. It is not known how these .....

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ional transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in com .....

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the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 5.11. Sub-clause (i) of the above rule, being the first step, provides that the net profit margin realized by the enterprise from an international transaction should be computed in relation to a base, such as, costs incurred or sales effected or assets employed, etc. Sub-clause (ii) provides that the net profit margin realized by the enterprise from t .....

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ble companies, as determined under sub-clause (iii), which is used as benchmark for the purpose of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Sub-clause (iv) states that the net profit margin realized by the enterprise, as referred in sub clause (i), is established to be the same as a net profit margin referred in sub-clause (iii) of the comparables. Sub-clause (v) states that the net profit margin thus establis .....

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gin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction with a similar base. 5.12. We find that there are certain inconsistencies in so far as the application of the above rule by the TPO is concerned. He worked out transfer pricing adjustment, by averaging the amount of adjustment computed by taking gross margins and net margins of comparables. All the sub-clauses of rule 10B(1)(e) refer to the calculation of net profit margin , which for all prac .....

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ransactions. Thus, it is essential that the profit margin to be considered must be from a comparable uncontrolled transaction. The term uncontrolled transaction has been defined in Rule 10A(a) to mean: a transaction between enterprises other than associated enterprises whether resident or non-resident. It is simple and plain that an uncontrolled transaction is always between two nonassociated enterprises. A transaction between two associated enterprises is considered as a controlled transaction .....

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imilar, thereby making it a controlled transaction. All the remaining 19 are foreign companies. The assessee distinctly placed a chart before the ld. CIT(A) which has been reproduced on page 12 onwards of the impugned order showing that all the 19 foreign companies were engaged in altogether different lines of business, such as, Sports goods, Bicycle shops, Manufacture and trader of shoes, Drug proprietors and sundries, Dealer of raw material for construction products, Grocery and related produc .....

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M. 6.1. Now, we take up the issue about the selection of the most appropriate method between RPM and TNMM in the given facts and circumstances. The ld. AR vehemently argued that if the CUP method is not to be applied, then, the next most appropriate method is Resale Price Method (RPM). This was opposed by the ld. DR who contended that the assessee characterized RPM as not the most appropriate method in its Transfer pricing study report and, hence, now it should not be allowed to argue contrary. .....

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ated by the assessee as most reliable method, is not really reliable in the facts and circumstances of the instant case for determining the ALP of the international transaction. Since both the TNMM and RPM were treated by the assessee as not reliable, we need to focus on merits as to which out of these two is the most suitable. 6.3. We have noted above the mandate of the TNMM as provided under rule 10B(1)(e). At this juncture, it will be befitting to note the prescription of rule 10B(1)(b), deal .....

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m obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the com .....

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rice at which the goods purchased by the enterprise from its AE are resold, is identified. Such resale price under sub-clause (ii) is reduced by the amount of normal gross profit margin from the purchase and resale of the same goods in a comparable uncontrolled transaction. The price so arrived at is reduced under subclause (iii) by the amount of expenses incurred by the assessee and the price so arrived at is adjusted to take into account the functional and other differences between the interna .....

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ge, is applicable where a property purchased from an AE is resold as such. Where, however, some value addition is made to the goods before resale, the RPM ceases to be an unfailing method. 6.5. Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the inter .....

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tions from the purchase and resale to the international transaction. Thus, there is an underlying presumption that all the relevant figures, including the amount of gross profit on purchase and resale of the comparables, are ex facie available from the accounts of such comparables. If comparables so chosen do not reflect the gross profit margin from purchase and resale of similar goods, without any allocation or truncation, then, this method loses its significance. If some of the otherwise funct .....

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nsed with. In such an eventuality, the next best method should be applied. 7. In view of the foregoing discussion, we set aside the impugned order on this score and direct the AO/TPO to determine the ALP of the transaction of Import of Crystal goods and Crystal components, firstly, by applying the RPM. It is hereby clarified that the manner of application of RPM is open at large before the TPO who will decide it in the way he thinks expedient. Contention of the ld. AR that the comparables should .....

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hrined in rule 10B(1)(e) of IT Rules, 1962, taking care of the infirmities discussed above in the earlier calculation made by the TPO. B. TP addition of AMP Expenses 8.1. During the course of first appellate proceedings, the ld. CIT(A) observed that no transfer pricing analysis was done in respect of the international transaction of advertisement, marketing and promotion (AMP) expenses. The assessee was called upon to benchmark this transaction. Taking note of bright line test and other relevant .....

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for a fresh adjudication in the light of the jurisprudence from the Hon ble Delhi High Court on this issue and similar order may be passed for this assessee as well. 8.3. On perusal of the order of the ld. CIT(A), it emerges that while holding AMP expenses as an international transaction, he did not have the benefit of the judicial precedents now available for consideration, in some of which the transaction of AMP expenses has been held as an international transaction, in others as not an inter .....

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ional transaction, has been restored for a fresh determination. There are three recent judgments of the Hon ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). Respectfully follo .....

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e international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon ble High Court, after allowing a reasonable opportunity of being heard to the assessee. 9. To sum up, we set aside the impugned order on the issue of transfer pricing additions towards Import of Crystal goods and Crystal components and AMP expenses and remit the matter to the file of AO/TPO for a fresh determination of the .....

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he course of assessment proceedings, it was noticed by the AO that the assessee made Provision for doubtful debts at ₹ 19,08,162/- and Provision for doubtful advances at ₹ 3,43,870/-. Addition was made for a total sum of ₹ 22,52,032/- as these two amounts , in the opinion of the AO, were not deductible. No relief was allowed in the first appeal. 10.2. At the outset, the ld. AR contended that similar issue came up for consideration before the Tribunal in assessee s own case for .....

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the A.Y. 2002-03 be followed. 10.3. It is noticed that the order for the A.Y. 2002-03 deciding the issue against the assessee was passed prior to the order for the A.Y. 2003-04 deciding the issue in favour of the assessee. A perusal of the later order divulges that there is no whisper, much less any reference whatsoever to the order of the tribunal for the immediately preceding year. The issue was argued before the tribunal as a new issue in the proceedings for the A.Y. 2003-04 and the bench con .....

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course of the proceedings for the A.Y. 2003-04. Similarly both the orders ought to have been placed before us as well without asking. 10.4. Notwithstanding the diagonally opposite views taken in the orders for the earlier years on the same issue, we proceed to examine the issue afresh. Provisions for doubtful advances disallowed by the AO amounts to ₹ 19,08,162/-. The ld. AR claimed that the amount is deductible u/s 36(1)(vii) of the Act. Section 36(1)(vii) provides that: subject to the p .....

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mplied with. 10.5. Computation of the amount of Provision for doubtful debts has been placed on page C-5 of the paper book. This is a detailed party-wise and year-wise chart showing Opening balance of the provision for doubtful debts, additions during the period, write back during the period, other incomes written off and closing balance of the provision. On enquiry, it was stated that the assessee is creating Provision for doubtful debts and reducing it from the amount of Debtors for the purpos .....

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unning account. Every year fresh provision, when created, is credited to such account. On making recoveries or at the time of final write off, the provision account is debited and net closing balance is carried forward to next year. Account of the debtor in respect of which a provision is created stands at gross level and the provision so created or adjusted is separately kept until the amount of provision is finally written off or back. This clarifies that the assessee is not writing off the am .....

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ly at the time and to the extent of the amount, which is actually written off in the books of account of the debtor. 10.6. The ld. AR relied on the judgment of the Hon ble Supreme Court in the case of Vijaya Bank vs. CIT (2010) 323 ITR 166 to bolster for the claim of deduction. This decision, in our considered opinion, is not relevant now. The Hon ble Supreme Court was dealing with A.Ys. 1993-94 & 1994-95 and it specifically noticed that : we may reiterate that it is not in dispute that s. 3 .....

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ittedly not a scheduled bank and the ld. AR was fair enough to candidly accept that the case is covered under clause (vii) and not clause (viia). Going by the language of clause (vii) of section 36(1), as it stands for the relevant assessment year, there can be no deduction at the time of creating a provision for doubtful debts. The legislature has clarified this position beyond any shadow of doubt by retrospectively inserting Explanation 1 to clause (vii) w.e.f. 1.4.1989 that : For the purposes .....

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s concerned. However, it is clarified that the amount of actual write off during the year should be allowed as deduction. The chart at page C-5 of the paper book shows such amount written off at ₹ 98,078/-. The AO is directed to verify if such amount has been actually written off in the books of account. If it is so, then, deduction should be allowed to that extent. As provision for doubtful debts is not deductible, correspondingly its write back also cannot be brought to tax. The AO is di .....

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t the time of write off, should not be deducted or not taxed once again. 11.1. As regards the Provision for doubtful advances amounting to ₹ 3,43,870/-, the ld. AR contended that this amount represents write off of amount due from Customs Department. It is obvious, as also accepted by the ld. AR that it is the amount of advances written off and not any bad debts written off. Unlike section 36(1)(vii) which provides for deduction on account of simple write off of bad debt subject to the ful .....

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e considered as irrecoverable under any circumstance so as to characterize it as a loss. We, therefore, following the view taken by the Tribunal in its order for the A.Y. 2002-03, uphold the disallowance. It is also clarified that a reversal of such a provision should not attract any tax as has been discussed qua the Provision for doubtful debts. In the like manner, it should also be ensured that there is no double deduction in view of the decision allowing deduction at the time of creation of a .....

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f the Act. Since the assessee could not prove that the insurance scheme of National Insurance Company was approved by IRDA, he sustained the disallowance. 12.2. We are unable to concur with the view adopted by the ld. CIT(A) in sustaining the disallowance. Admittedly, insurance policy was taken by paying premium to National Insurance Company Ltd. We fail to appreciate as to how the assessee can bring material on record to demonstrate that the insurance policy taken from National Insurance Compan .....

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l. 13.1. The only other ground which survives in the assessee s appeal is against not allowing depreciation on foreign exchange loss of ₹ 8,50,330/- capitalized in the block of Buildings. On perusal of the details filed by the assessee and Schedule of fixed assets, it was observed by the AO that there was an addition in the block of Building amounting to ₹ 1,45,31,376/-. The assessee could produce bills only for a sum of ₹ 1.10 crore, leaving a difference of ₹ 34.47 lac. .....

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n be allowed on forex loss on retranslation of loan taken in foreign currency for Building. This depends on answer to the question as to whether such forex loss can be lawfully added to the block of Building . It is undisputed that loan in foreign currency was specifically taken for Building in India, which is now being used for the business purpose. 13.3. Section 32(1)(i) of the Act deals with allowing of depreciation. It provides that depreciation in the case of any block of assets, including .....

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the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased. This provision indicates that increase in the block of assets is envisaged onl .....

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ces as are prevailing before us. Then, there is section 43A, which contains special provisions consequential to changes in rate of exchange of currency. This section provides that : Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of suc .....

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the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from the actual cost of the asset as defined in clause (1) of section 43 . A conjoint reading of the above provisions discerns that ordinarily in a block of assets, the actual cost of an asset fixed before putting .....

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a loan obtained in foreign currency. Thus it is overt that forex loss in respect of assets acquired in India cannot be treated as cost of acquisition so as to increase the value of block of assets for entitling the assessee to depreciation. If the contention of the ld. AR is accepted that such increase due to forex loss is contemplated u/s 43(1) itself and there is no need to approach section 43A, then the very existence of section 43A becomes meaningless. Placement of a separate section 43A sho .....

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ch the Hon ble Supreme Court, noting the provisions of section 43A held that : Sec. 43(1) defines actual cost for the purpose of grant of depreciation etc. to mean "the actual cost of the assets to the assessee". Till the insertion of the unamended s. 43A there was no provision in the IT Act for adjustment of the actual cost which was fixed once and for all, at the time of acquisition of the asset. Accordingly, no adjustment could be made in the actual cost of the assets for purposes o .....

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not of depreciation on the increased value of asset due to change in foreign currency rate after its acquisition. Obviously, the assessee has been granted deduction of interest on such loan taken for acquiring building and dispute is only for depreciation on the amount of forex loss capitalized by the assessee, which issue is governed by Woodward Governor (supra) and not India Cements (supra). We, therefore, hold that the authorities below were justified in denying depreciation on increase in t .....

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