TMI Blog2017 (8) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... ange fluctuation loss - Held that:- Packing credit foreign currency borrowings which is in the nature of working capital borrowings and the exchange fluctuation on this count to be considered as a revenue expenditure and to be allowed Disallowance u/s 40(a)(i) - leased telephone lines on the reason that there was no deduction of TDS - as per assessee reimbursement of expenditure towards leased telephone lines does not include any profit element being, so, there cannot be any TDS on this payment - Held that:- The assessee has to demonstrate that this impugned payment does not include any profit element so as to deduct TDS and it is only reimbursement of actual expenses. Before us, the learned authorised representative was not able to demonstrate that it does not include any profit element. Accordingly, we remit this issue to the file of the Assessing Officer and the assessee is directed to show that this is only reimbursement on cost to cost and it does not include any element of profit. This ground is allowed for statistical purposes for both the assessment years. Disallowance of additional depreciation under section 32(1)(iia) - Held that:- Same issue was decided against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal is partly allowed for statistical purposes. Non-giving of TDS credit - Held that:- If the assessee is remitted the TDS, the same credit should be given to the assessee in respective assessment years. Accordingly, we remit this issue to the file of the Assessing Officer to give due TDS credit to these assessment years and the assessee is directed to file necessary details to the Assessing Officer. This ground of appeals of the assessee is partly allowed for statistical purposes. Addition made towards corporate guarantee - Held that:- The identical issue came for consideration for the assessment year 2010-11 in the case of Redington (India) Ltd. v. Addl. CIT [2015 (8) TMI 40 - ITAT CHENNAI] to hold that the corporate guarantee given by the assessee to its associated enterprises does not involve any cost to the assessee, therefore, it has no bearing on the profits, income, loss or assets of the assessee and outside the ambit of the international transaction to which the arm's length price adjustment has to be made. According, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition. Reduction of claim u/s 10B - app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhukar Bhusari, Departmental Representative ORDER Chandra Poojari (Accountant Member) 1. These cross-appeals by the assessee and by the Revenue are directed against the different orders of the Dispute Resolution Panel (DRP), Chennai. 2. First, we take up the assessee's appeal in I. T. A. Nos. 558/Mds/16 and 444/Mds/15 and 560/Mds/16 for the assessment years 2008-09, 2010-11 and 2011-12. 2.1 The common grievance of the assessee in I. T. A. Nos. 558/Mds/16 and 444/Mds/15 is with regard to the disallowance of unrealised exchange loss considering the same as speculation loss and not treating it as business loss relying on the Central Board of Direct Taxes Instruction No. 3 of 2010, dated March 23, 2010 on mark to market losses. 3. We consider the facts of the case as narrated in the assessment year 2008-09 for brevity that the assessee claimed unrealised exchange loss on account of derivative transaction to the tune of ₹ 3,76,68,000. According to Assessing Officer, the assessee's claim of losses on account of valuing the foreign exchange liabilities/receivables at the rates prevailing as on March 31, 2010 are not on account of foreign exchange rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to claim the losses, as deductions in any subsequent years and what is required to be seen is whether the assessee is entitled for deduction of a particular amount, as per the provisions of the Income-tax Act. Accordingly, the Dispute Resolution Panel came to the conclusion that the assessee is not entitled to claim the exchange losses on account of valuation of the outstanding hedging/forwarding contracts as on 31st March of the previous year, as an allowable deduction under the provision of the Income-tax Act and justified the action of the Assessing Officer. Aggrieved, the assessee is in appeal before us. 4. We have heard both the parties and perused the material on record. In our considered opinion, the similar issue came for consideration before this Tribunal in the case of Majestic Exports v. Joint CIT (I.T.A. Nos. 1336 and 3072/Mds/2014 for the assessment years 2009-2010 and 2010-2011 vide order dated July 24, 2015) the Tribunal held as follows : We have heard both the parties and perused the material on record. In this case, the assessee was engaged in the business of manufacturing and export of hosiery garments. During the course of export, the assessee en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivative'. 8. From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of section 43(5) of the Act which provides the definition of 'speculative trans action' exclusively for purposes of sections 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have the same treatment as regards application of the Explanation to section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction. 8.1 Now, this view has been taken by a co-ordinate Bench, Chennai in the case Aishwarya and Co. P. Ltd. (I. T. A. No. 860/Mds/2014, dated May 29, 2015), wherein they followed the judgment of the Calcutta High Court in the case of CIT v. Baljit Securities P. Ltd. [2014] 368 ITR 470 (Cal) ; 88 CCH 313 wherein held as under (page 471 of 368 ITR) : 'Clause (d) of section 43(5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done.' 9. From the above decision of the Calcutta High Court in the case of Baljit Securities P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 40(a)(i) of the Act on leased telephone lines on the reason that there was no deduction of TDS. 6. The facts of the case as narrated for the assessment year 2009-10 are that during the year, the assessee has incurred expenditure of ₹ 23,20,362 towards leased telephone lines. The assessee has not deducted TDS on this expenditure. When the assessee was asked to explain why the above expenditure should not be disallowed under section 40(a)(i), the assessee stated vide letter dated February 17, 2015 that no tax was deducted at source since the same was only reimbursement of expenses and they were incurred outside India. The payment towards leased telephone lines has been made to TRW Automotive Services SDN BHD, Malaysia for obtaining telephone lines for the purpose of data transfer. Hence, the payment amounts to royalty for using the leased lines and the assessee should have withheld the tax on the said payment and the decision of the Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. v. ITO (International Taxation) [2014] 361 ITR 575 (Mad) ; (TS-577-HC-2013) is applicable in this case. 6.1 Further, it was observed that bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 131 TTJ (Mumbai) 702 (f) CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom) ; [2009] 177 Taxman 81 (Bom) (g) DIT (International Taxation) v. WNS Global Services (UK) Ltd. [2013] 214 Taxman 317 (Bom) (h) Channel Guide India Ltd. v. Asst. CIT [2012] 20 ITR (Trib) 438 (Mumbai) (i) CIT (Deputy) v. Hofincons Infotech and Industrial Services (P) Ltd. [2012] 152 ITD 249 (Chennai) (j) Metro and Metro v. Addl. CIT [2014] 29 ITR (Trib) 772 (Agra) ; [2013] 158 TTJ 308 (Agra) (k) Sterling Abrasive Ltd. v. Asst. CIT [2011] 140 TTJ 68 (Ahm) (l) United Helicharters (P.) Ltd. v. Asst. CIT [2013] 60 SOT 58 (Mum)(URO). 10. In our opinion, the assessee has to demonstrate that this impugned payment does not include any profit element so as to deduct TDS and it is only reimbursement of actual expenses. Before us, the learned authorised representative was not able to demonstrate that it does not include any profit element. Accordingly, we remit this issue to the file of the Assessing Officer and the assessee is directed to show that this is only reimbursement on cost to cost and it does not include any element of profit. This ground is allowed for statistical purposes for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned authorised representative was not accepted by the Dispute Resolution Panel and relying on the orders of this Tribunal, Chennai Bench, in the cases of CRI Pumps P. Ltd. v. Asst. CIT [2013] 58 SOT 154 (Chennai) and Deputy CIT v. I.P. Rings Ltd. (I. T. A. No. 1328/Mds/2014 dated September 26, 2014) which was confirmed by the Madras High Court in the case of M. M. Forgings Ltd. v. Addl. CIT [2012] 349 ITR 673 (Mad) ; [2012] 11 taxmann.com 367, the Dispute Resolution Panel disallowed the claim of the assessee. Aggrieved, the assessee is in appeal before us. 12. We have heard both the sides and perused the material on record. In our opinion, same issue was decided against the assessee by the Tribunal in the assessee's own case for the assessment year 2007-08 in I. T. A. Nos. 266 and 656/Mds/2012) vide order dated March 22, 2013 wherein held that : We have perused the orders and heard the rival submissions. The claim of the assessee is under section 32(1)(iia), which allow additional depreciation for new machinery or plant acquired and installed after 31st March, 2005. The said sub-clause (iia) of section 32(1) reads as under : '32 (1) In respect of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which assets were put to use and not for any succeeding year. There is nothing in the statute which allows carry forward of such depreciation. There cannot be any presumption that unless it is specifically denied, carried forward has to be allowed. What can be carried forward and set off have been specifically mentioned in the Act. This Tribunal in the assessee's own case in I. T. A. No. 1069/Mds/2010, dated January 6, 2012, at paragraph 15, held as under : '15. We have considered the rival submissions. A perusal of the provisions of section 32 as applicable for the relevant assessment year clearly shows that additional depreciation is allowable on the plant and machinery only for the year in which the capacity expansion has taken place which has resulted in the substantial increase in the installed capacity. In the assessee's case this took place in the assessment year 2005-06 and the assessee has also claimed the additional depreciation during that year and the same has also been allowed. Each assessment year is separate and independent assessment year. The provisions of section 32 of the Act do not provide for carry forward of the residual additional depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parately. Further, all the funds, i.e. the interest-free own funds and the interest bearing borrowed funds are put into a common pool of funds. From this common kitty all the outgoings (i.e. investments in shares, regular business expenses etc.) are met with. In other words, once the funds, i.e. whether the interest-free own funds or the interest bearing borrowed funds, are put into a common pool of funds, they will lose their distinction and all types of funds will be treated alike. In such a situation, the only way to ascertain the investments made from the borrowed funds, if any, is on a proportionate basis. Therefore, the interest expenses, which could not be directly linked to any activity are to be treated as common interest expenses and considered in the step 2 of the formula given in rule 8D for the purpose of attributing the indirect interest burden on the investments made on proportionate basis. 14.3 Further, it was observed by the Dispute Resolution Panel that the disallowance of expenses under section 14A read with rule 8D is in relation to the earning of the exempt income and not in relation to the exempt income earned as such. The disallowance of expenses is always ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the material on record. The learned authorised representative placed reliance on the judgment of the Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi) wherein held that : The expression 'does not form part of the total income' in section 14A of the Income-tax Act, 1961, envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Further, it is held that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee was not in doubt, no disallowance could be made under section 14A . 15.1 Further, the jurisdictional High Court in the case of Redington (India) Ltd. v. Addl. CIT [2017] 392 ITR 633 (Mad) (T. C. No. 520 of 2016 dated December 23, 2016) held that (page 639) : The exemption extended to dividend income would relate only to the previous year when the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has already been examined by the Tribunal in the assessee's own case for the assessment year 1989-90 (in I. T. A. No. 3191/Mds/92 dated February 6, 2003, wherein it was held that in the absence of any nexus, the research and development expenses should not be apportioned to the 100 per cent. export oriented units. Regarding the apportionment of exempt income to the 100 per cent. export oriented units, the assessee submitted that if at all, such apportionment is warranted, it should be an addition to the eligible profits of the business and not a reduction from the profits and the assessee submitted that such apportionment is unjustified and unwarranted. 17.2 The Dispute Resolution Panel after considering the Tribunal decisions in I. T. A. No. 3191/Mds/92 for the assessment year 1989-90 and I. T. A. Nos. 266 and 656/Mds/2012 for the assessment year 2007-08 observed that the facts and circumstances of the present case are exactly identical to those involved in the assessment year 2007-08, where the Tribunal directed the Assessing Officer to examine certain factual details and apportion the research and development expenses if the research and development results are being use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which section 10B deduction was claimed. We are of the opinion that the matter requires a fresh look by the Assessing Officer. The Assessing Officer has to verify whether the research done by the assessee had any tangible benefit vis-a-vis the activities carried on by it from the units on which deduction under section 10B was claimed. The Assessing Officer has to compute such data with regard to research expenditure incurred in earlier years and come to a conclusion in this regard. The assessee has to co-operate with the Assessing Officer and give necessary information. We, therefore, set aside the orders of the authorities below and remit this issue back to Assessing Officer for consideration afresh. Therefore, this issue is remitted to the file of the Assessing Officer on similar directions. 19. The next issue in the assessee's appeal in I. T. A. Nos. 444/Mds./15 and 560/Mds./16 for the assessment years 2010-11 and 2011-12 is with regard to the disallowance of weighted deduction under section 35(2AB) of the Act. 19.1 The facts of the case are that the assessee during the financial year 2009-10 claimed to have incurred research and development expenditure of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total research and development (revenue) expenses incurred ₹ 2635.34 lakhs Therefore, the assessee stated that it had claimed a weighted eduction of ₹ 39,53,73,310, being 150 per cent. of 2635.82 lakhs under section 35(2AB) of the Act. The assessee, before the Panel, further explained that if the above calculation is not acceptable to the Revenue, to the extent of research and development expenses approved by the DSIR, the deduction may be allowed at the rate of 150 per cent. under section 35(2AB) of the Act. On the balance of the research and development expenses, which were not allowable under section 35(2AB), normal rate of deduction of 100 per cent. may be allowed under section 35(1)(i) of the Act. After considering the submissions of the assessee, the Dispute Resolution Panel observed that the assessee's alternative claim of balance of 50 per cent. of the weighted deduction under section 35(2AB) of the Act is not allowable. Against this, the assessee is in appeal before us. 20. We have heard both the sides and perused the material on record. The learned authorised representative relied on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 35(2AB) of the Act. Therefore, we, by reversing the orders of the authorities below, hold that the assessee is entitled to weighted deduction on the said amount at 150 per cent. as per section 35(2AB) of the Act. Hence, ground No. 1(b) of the appeal taken by the asses see is allowed. 20.1 In view of the above decision of the co-ordinate Bench of the Tribunal, we are inclined to hold that this section excludes from weighted deduction only cost of land and building and not any charges and expenses related to land or building. The repairs, rent, etc., the expenditure incurred relating to research and development premises cannot form part of cost of land or building. Accordingly, the Assessing Officer is directed to pass a fresh order in the light of the above order of the Tribunal after giving opportunity to the assessee. This ground of appeal is partly allowed for statistical purposes. 21. The next issue in assessee appeals in I. T. A. Nos. 444/Mds./15 and 560/Mds./16 for the assessment years 2010-11 and 2011-12 is with regard to non-giving of TDS credit. 21.1. We have heard on this issue. In our considered opinion, if the assessee is remitted the TDS, the same c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s length price of the service charges, while extending the corporate guarantee, at 1 per cent. of the outstanding principal loan at the beginning of the year. It was submitted that the corporate guarantees issued on behalf of the associated enterprise is not an international transaction because the company has not incurred any costs in executing the said guarantees. Only when a cost can be attached thereto, the arm's length testing for the costs can be done. To support its view, the assessee placed reliance on the decisions of the Tribunal in the cases of Bharti Airtel Ltd. v. Addl. CIT [2014] 2 ITR (Trib)-OL 475 (Delhi) (I. T. A. No. 5816/Delhi/2012 dated March 11, 2014 for the assessment year 2008-09) and Redington India Ltd. v. Joint CIT (I. T. A. No. 513/Mds/2014 dated July 7, 2014) as well as the order of the Dispute Resolution Panel in the assessee's own case for the assessment year 2010-11. 24. 24.1 Further, it was submitted that the corporate guarantees were issued only to provide a comfort level to the lending banks. These guarantees does not have any impact on the income, profits/losses or the assets of the company. The execution of corporate guarantees's o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute Resolution Panel has also found that justification of the transaction on the ground of close relationship is self-defeating the concept of the arm's length price (ALP). Accordingly, the Dispute Resolution Panel confirmed the view taken by the Transfer Pricing Officer. 2. We have considered the rival submissions on either side and also perused the material available on record. We have carefully gone through the decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd v. Addl. CIT [2014] 2 ITR (Trib)-OL 475 (Delhi). This Tribunal found that the corporate guarantee issued for the benefit of the associate enterprise does not involve any cost to the assessee and does not have any bearing on profit, income or loss of assets of the assessee, therefore, it was outside the ambit of the international transaction to which the arm's length price adjustment can be made. The Dispute Resolution Panel has also placed its reliance on Explanation to section 92B of the Act. The decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. v. Addl. CIT (supra) was followed by the Chennai Bench of this Tribunal in the assessee's own case for the assessment year 2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39. We have perused the orders and heard the rival submissions. No doubt, the hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 (Karn) had held that exemption under section 10A was to be allowed without set off of brought forward unabsorbed loss and depreciation from earlier assessment year or current assessment year from a non-STP unit. The Special Bench of this Tribunal in the case of Scientific Atlanta India Technology Pvt. Ltd. v. Asst. CIT [2010] 2 ITR (Trib) 66 (Chennai) ; [2010] 38 SOT 252 (Chennai) had also held that deduction under section 10A was undertaking specific. The analogy will clearly apply in the case of units on which deduction is claimed under section 10B as well, since section 10A and section 10B are similarly worded. Nevertheless, the issue before the hon'ble Karnataka High Court, was regarding the claim of deduction under section 10A, on profits of an EOU, without setting off of brought forward loss of the earlier years. In our opinion, the issue before the hon'ble Karnataka High Court was entirely different from the issue raised by the Revenue before us. Here it is a claim for set off loss of a unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ums) is not under obligation to deduct any TDS on such payments. Consequently, the provisions of section 40(a)(i) have no application. Further, the assessee submitted that the issue is covered in favour of the assessee by the decision of the Tribunal in the assessee's own case for the assessment year 2007-08 in I. T. A. Nos. 266 and 656/Mds/2012 dated March 22, 2013. Regarding the interest payment, the assessee submitted that though the interest was paid to a Hong Kong Branch of SBI, the legal entity, i.e. State Bank of India is an Indian public sector scheduled bank and hence there was no need to deduct any TDS on the interest payments. Regarding the leased telephone line charges, the assessee submitted that they are only reimbursement of expenses and hence, the provisions of section 40(a)(i) of the Act are not applicable. Regarding the tool development charges, the assessee claimed that these expenses represent the development charges of certain tools including the procurement of raw material for development of the said tools. The non-residents procure the material, develop them into tools and use the tools in the manufacturing activity outside the country. Since the procurem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagerial services rendered by the non-residents outside India. Further, as per the Revenue, Explanation inserted by the Finance Act, 2010 under section 9(2) of the Act with retrospective effect from June 1, 1976, had dispensed with the condition regarding residence or place of business or business connection in India, for attracting the rigours of section 9(1)(vii). Therefore, according to them, the Commissioner of Income-tax (Appeals) fell in error in holding that the assessee was not liable to deduct tax at source. In this regard it is important to have a look at the explanations given by the assessee on the payments effected by it to the non-residents. With regard to commission, the assessee had before Assessing Officer, given a copy of the letter issued to the non-resident party which read as follows : 'Assistance You will render full assistance and co-operation with regard to the follow up of schedules and other correspondence that emanate from customers from time to time regarding the agreed products. You will also be required to ensure the consignments are cleared, warehoused and distributed by nominated agents for onward delivery to customers. Expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and the on time delivery of the products to VTC in the quantities agreed upon. VLC and Brakes India will, until the termination of this agreement meet together at agreed intervals but in any event no less than once every half year at an agreed location to review the progress of the services.' 47. In our opinion, the nature of services mentioned above will come not within the definition of 'fees for technical services' given under Explanation 2 to section 9(1)(vii) of the Act. By virtue of such services, the concerned recipients had not made available to the assessee any new technic or skill which the assessee could use in its business. The services rendered by the said parties related to clearing, warehousing and freight charges, outside India. The logistics service rendered was essentially warehousing facility. In our opinion, this cannot be equated with managerial, technical or consultancy services. Even if it is considered as technical service, the fee was payable only for services utilised by the assessee in the business or profession carried on by the said non-residents outside India. Such business or profession of the non-residents, earned them income outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resolution Panel. Aggrieved, the Revenue is in appeal before us. 35. We have heard both the sides and perused the material on record. Similar issue was considered by the Tribunal in the assessee's own case in I. T. A. Nos. 266/Mds/12 and 656/Mds/12 for the assessment year 2007-08 wherein held that : 58. We find that this issue had come up in assessee's appeal for the assessment year 2006-07. This Tribunal at paragraph 16 of its order dated January 6, 2012 (supra), had held as under : '16. In regard to ground No. 2 it was submitted by the learned authorised representative that the issue was against the action of the learned Commissioner of Income-tax (Appeals) in confirming the disallowance of higher depreciation on the UPS which was energy saving device. It was fairly agreed by both the sides that the issue was now covered by the decision of the co-ordinate Bench of this Tribunal in the case of Deputy CIT v. Surface Finishing and Equipment reported in [2003] 81 TTJ (Jodhpur) 448 . As it is noticed that the issue is squarely covered by the decision of the co-ordinate Bench of this Tribunal, referred to supra, the Assessing Officer is directed to grant the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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