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Lanco Infratech Ltd. Versus Asst. Commissioner of Income-tax, Circle – 16 (1) , Hyderabad

2017 (12) TMI 259 - ITAT HYDERABAD

Transfer Pricing adjustment - interest on the advances paid - Held that:- As the issue under consideration is materially identical to that of AY 2011-12, following the decision of the coordinate bench in that year considering that the assessee has already received 6.37% interest which is more than the Singapore prime lending rate of 5.38%. We delete the addition made on this count. At the same time, the DRP has confirmed the addition simply because the assessee has not submitted information befo .....

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r authorities, they could have recorded the same before the authorities instead of maintaining silence. - Transfer pricing adjustment towards corporate guarantee - Held that:- As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, we direct the AO/TPO to fix the fees at 0.27% as guarantee commission on the amount involved. Accordingly, the grounds raised by the assessee are partly allowed. - Adjustment in respect of international t .....

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. Moreover, these business advances cannot be categorized as ‘loans and advances’ so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. - TPA - selection of JEP Holdings as comparables - Held that:- As this comparable co .....

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may be considered for ALP adjustment by removing the above from comparables, in case the final ALP is within the +/- 5% range, claim of the assessee may be accepted. - Addition on account of sub-contract expenses - Held that:- As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. .....

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basis of I.T. provisions. - ITA No. 221/Hyd/2017 - Dated:- 30-11-2017 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri P. Murali Mohan Rao For The Revenue : Smt. Pallavi Agarwa ORDER PER S. RIFAUR RAHMAN, A.M.: 2. This appeal of the assessee is directed against the order passed u/s 143(3) r.w.s. 92CA and 144C(13) of the Income Tax Act, 1961 (in short Act ) dated 15/12/2016 relating to AY 2012-13. 3. Brief facts of the case are, assessee .....

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Arms Length Price, who has proposed adjustments in respect of assessee s international transactions for the year under consideration, as under: Transaction Adjustment (Rs.) Interest received on loans 1,29,54,309 Corporate Guarantee 90,03,54,380 Interest on receivables 131,12,22,228 Work Contract Expenses 195,72,44,551 Total 418,17,75,468 2.1 Assesse had filed objections against the TP order before the AO, however, AO finalized the draft order by incorporating the adjustments proposed by TPO. As .....

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ransaction of loans provided to Lanco International Pte Ltd., Singapore, because, the Prime Lending Rate (PLR) of the Singapore commercial bank is a good external comparable for the loans advanced to its AE incorporated and functioning in Singapore. It was further submitted that even as per the RBI guidelines and recommendations, the Singapore PLR is appropriately used as the benchmark rate in this transaction. Further, it was submitted that the assessee had charged interest @ LIBOR + 5.25% from .....

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ejecting the submissions of the assessee, the TPO asked the assessee as to why interest @ 14.75 should not be charged on the advances paid. There was no reply from the assessee. The TPO, thus, held that under arm s length situation how much interest could be earned is to be seen and as a hypothetical CUP would be where the Indain entity invests in bank deposits, stocks, mutual funds or real estate, the corresponding return would still be the effective Indian interest rate. Thus, the TPO adopted .....

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te the arm s length nature of loan transactions and in adopting an arbitrary approach to determine the arm s length interest rates. Further, the assessee objected that the TPO erred by considering domestic bank rate in order to determine arm s length interest rate for a foreign currency denominated loans and the approach of the TPO is not in accordance with the established commercial principles. 4.4 The DRP upheld the action of the TPO by observing that in the absence of justification for not re .....

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o. 450/Hyd/2016 (Assessee s own case) 2. CIT Vs. Cotton Naturals India Pvt. Ltd., [2015] 276 CTR 445 (Del.) 3. EKL Appliances, Delhi High court in ITA No. 1068/2011. 4.6 Ld. DR, on the other hand, relied on the order of DRP. 4.7 Considered the rival submissions and perused the material facts on record. In assessee s own case for AY 2011-012 (supra), the coordinate bench of this Tribunal has held as under: 5. We have considered the rival contentions and perused the details available on record. Th .....

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ans advanced in foreign currency. Either LIBOR or EURIBOR or in this case, Singapore PLR are to be considered. Further, the said issue has been specifically considered by the Hon'ble Delhi High Court in the case of Cotton Naturals India Pvt. Ltd with specific reference to the case of Logix Microsystem Private Limited, relied on by DRP in their order. The finding of Hon'ble High Court with respect to the same is summarised as below • Transfer pricing determination is not primarily un .....

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sessee to the subsidiary, should not be seen in isolation, but also for the purpose of maximizing returns, propelling growth and expanding market presence. • This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricing determination would decide what an independent distributor and marketer, on the same contractual terms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party woul .....

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down by the Co-ordinate Benches as relied on by the Ld. Counsel and also by various judicial pronouncements of the High Courts relied upon, we are of the opinion that there is no need for any adjustment on this account, as assessee has already received 6.37% interest which is more than the Singapore prime lending rate of 5.38%. In view of that, we delete the addition made by the AO/TPO/ DRP. Assessee s grounds on this are allowed. As the issue under consideration is materially identical to that .....

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LP adjustment without proper verification. In the same breath, we also condemn the action of the assessee in not properly submitting the required information to lower authorities. In case of inability to submit the information before lower authorities, they could have recorded the same before the authorities instead of maintaining silence. This kind of behavior leads to unnecessary wasting of judicial time at the different appellate authorities. Accordingly, ground No. 7 is allowed. 5. Ground No .....

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lue (INR) as on March 31, 2012 Nature LRIPL ICICI Bank Ltd., Singapore Branch USD 137.50 Mn. ₹ 63945.63 lakhs (Guarantee value ₹ 70,340.18 lakhs) Loan facility LRAPL ICICI Bank Ltd., Singapore Branch USD 742.50 Mn. ₹ 3,45,306.38 lakhs (Guarantee Value ₹ 3,79,837.01 lakhs) Loan facility LRAPL ICICI Bank Ltd., Singapore Branch USD 55 Mn Rs. Nil Hedge LInPL Barclays Bank Plc, London USD 40 Mn Rs. Nil Hedge LInPL DBS Bank Ltd. USD 15 Mn Rs. Nil Hedge LInPL Standard Chartered .....

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s to why corporate guarantee fee should not be charged as per SBI guidelines, the assessee submitted that a Banker cannot be considered for the purpose of CUP since it is a quotation and not an actual uncontrolled transaction . Further, it was submitted that bank guarantees are not comparable with corporate guarantees since such corporate guarantees are issued based upon the business needs and not based on risk assessment or underlying asset which generally the banks ask for. Therefore, corporat .....

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s regarding how the corporate guarantee fee is computed. The TPO had also referred to the Government Policy of the Ministry of Finance, Govt. of India, September 2010. It was thus gathered that the banks charge corporate guarantee upfront at the time of issue of the guarantee itself. He opined that in case of guarantees covering more than one financial year the fee is charged by the banks at the beginning of the financial year on the outstanding amount. Therefore, the TPO had adopted the same me .....

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CA of the IT Act, by the TPO. 5.4 Aggrieved, the assessee raised objections before the DRP as under: • The Ld. TPO erred in not appreciating the fact that corporate guarantee was given by Assessee for its own commercial expediency and for the overall benefit of the Assessee. It was the Assessee s Obligation to take the loan and pay for the acquisition of the asset as the Assessee was the successful bidder instead it chose to incorporate the SPVs (newly created 100% subsidiaries) to avail th .....

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ting the ALP of the corporate guarantee fee using 'CUP' as the most appropriate method and by applying the rates of SBI without any basis and without complying with the procedure laid down for computation of arm's length price as given in the Provisions of section 92C of the Act. • Without prejudice to above, the ld. TPO erred in calculating the guarantee fee on the entire amount of the guarantee instead of restricting the amount to the extent of the withdrawal of loan by the AE .....

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ged fees at a reasonable percentage at 0.27% as held in assessee s own case before DRP. He relied on the following cases: 1. Dr. Reddy s Laboratories Vs. ACIT, ITA No. 294/Hyd/2014 & ITA No. 458/Hyd/2015 2. Siro Clinpharm Pvt Ltd. Vs. DCIT, ITA No. 2876/Mum/2014 3. Bharti Airtel Ltd. Vs. Addl. CIT, ITA No. 5816/Del/2012 4. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010/ [2014] 41 Taxmann.com 71 (Mum. 5. Lanco Infratech Ltd. Vs. DCIT, AY 2011-12 in ITA No. 450/Hyd/2016 (assessee s own case .....

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in the corporate guarantee fee to be considered as international transaction. However, the Hyderabad Benches of ITAT is consistently following the principle that corporate guarantee is to be considered for the purpose of Transfer Pricing adjustments as the transaction of providing corporate guarantee is considered as international transaction . To be consistent with the opinion already taken in earlier decisions, Ld. Counsel was given an option to press or not to press the issue on this. Ld. Co .....

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in the case of Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010) (supra) we however, direct the AO/TPO to consider only 0.27% as the guarantee commission on the amount involved. The contention that corporate guarantee fee to be considered proportionately with the period it availed, cannot be accepted as guarantee fee is upfront and one time fee paid at the beginning and therefore, on the corporate guarantees provided during the year, the rate is to be applied. However, if any of the corporate gu .....

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ounds are considered partly allowed as far as the appeal of assessee is concerned. Since the issue is considered in the light of the Co-ordinate Bench decisions, we find no merit in Revenue contentions of adopting rate at 2% adopted by the TPO which has no basis. Accordingly, Revenue grounds on this issue are rejected. Cross-Objection is in support of the DRP order which in our view, becomes academic. Accordingly, the Cross-Objection is also considered dismissed for statistical purposes. As the .....

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01/2016 as to why interest should not be charged @ 14.75% on the outstanding receivables. The assessee neither furnished the month-wise break up of receivables nor has objected to charging of interest in its reply dated 22/01/2016. However, in its reply assessee stated that the balances are receivable against the mobilization advances and no further clarification or the details as called for had been submitted, as noted by TPO. 6.2 After considering the submissions of the assessee, the TPO obser .....

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e interest chargeable as under: Outstanding receivables from AE ₹ 8889642223 Interest @ 14.75% on ₹ 888964223 ₹ 1311222228 Less: interest charged NIL Adjustment ₹ 131,12,22,228/- Thus, the ALP of the interest chargeable on receivables was determined at ₹ 131,12,22,228/- and the shortfall of ₹ 131,12,22,228/- was treated as adjustment u/s 92CA of the Act, by the TPO. 6.3 Aggrieved, the assessee raised objections before the DRP, which are as under: • The Ld .....

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s of agreements with them. • The Ld. TPO ought to have appreciated the fact that the mobilization advances are to be adjusted against future supplies or recovered from each bill raised on the contract work completed over the stipulated period and cannot be said to be due and not collected. • The Ld. TPO ought to have appreciated that the Assessee did not charge any interest on mobilization advances given to its Non - AEs and that not charging any interest to its AEs is consistent with .....

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6.4 The DRP observed that no justification was given as to why the assessee chose not to reply the TPO when the opportunity was given and additional information filed before it, which was forwarded to the TPO for their comments. The TPO submitted her report dated 02/11/2016 negating the claims of the assessee as well as relying on the order of the earlier panel of DRP. Considering the same, the DRP held that as the onus of proving the claims made has not been discharged by the assessee, the obj .....

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actions is comparable with that of non-charging from uncontrolled transactions, in these international transactions, no transfer pricing adjustment can be made on this count. He relied on the following cases: 1. Lanco Infratech Ltd. Vs. DCIT, AY 2011-12 in ITA No. 450/Hyd/2016 (assessee s own case) 2. EKL Appliances Ltd. Vs. CIT, ITA No. 1068/2011 of Delhi HC 3. CIT Vs. Indo American Jewellery Lt., ITA No. 1053 of 2012. 6.7 The ld. DR, on the other hand, relied on the orders of TPO and DRP. 6.8 .....

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essee s case, assessee is undertaking an EPC contract and has received mobilization advances as part of that. Like-wise, assessee has given some works to other parties on sub-contract basis and necessarily it has to provide mobilization advances to the parties. It is also noticed that assessee has advanced mobilization advances to both AEs and non-AEs and no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances r .....

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the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to work contract expenses are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course o .....

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down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment. As seen from the order of the TPO in the next year AY 2013-14, he has considered the same issue and has not made any adjustment by stating as under: 7.5 Receivables: With regard to receivables it is noticed from the information filed that the company is not exporting and supplying any goods or services to AEs. The balances appearing in the Balance Sheet are mobilization advances which .....

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therein, we allow the grounds raised by the assessee on this issue and accordingly interest charged on mobilization advances are deleted. 7. Ground Nos. 10a to 20g relate to ALP adjustment in respect of international transaction of work contract expenses for an amount of ₹ 195,72,44,551/-. 7.1 The TPO observed that the analysis carried out by the taxpayer under TNMM by taking itself as the tested party is not acceptable. As the amount involved in the transaction with AE when compared to t .....

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hence, should be selected as the tested party for the economic analysis). Similar approach has been followed in the assessee's case in the previous year and it has been concluded that the payments were at arm's length, since, the margins of the Singapore entity as compared with the foreign comparables was within +/- 5%. An economic analysis for the current year is as follows: 7.2 The TPO conducted search for suitable comparable companies in One source database (considering companies in .....

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g adjustment: The financials of the Lanco International Pte Ltd., Singapore are as follows: (in US $) Revenue 793781630 Add: Exchange difference -410612 Operating Revenue 793371018 Cost of Sales 677847841 Add: Operating expenses 32380775 Less: Loan interest 0 Operating Cost 710228616 Operating profit 83142402 OP/OC 11.70 OP/OR 10.48 7.3 TPO observed that Onesource database was used to identify the comparable companies in Singapore which are in similar line of business. Turnover fileter of Mil US .....

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International Ltd. 13.76 12.10 Tritech Group Ltd. 6.20 5.84 Arithmetic mean 4.95 3.92 After applying the average margins of the comparables to the financials of the assessee, the results are as under: Description Amount Arm s length price 4.95% Actual works contract expenses paid 29836044988 Arm s Length Margin (%) (ALM(OP/OR) 3.92% Transfer price (Margin of Singapore Pte) with higher range +/-5% of 10.19%), hence not within arm s length 10.48% Excess margin over and above the arm s length 6.56 .....

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ssee in the Transfer Pricing Documentation ( TP Report"). • The ld. ld. TPO/ AO erred in selecting UPL, Singapore as the tested party since it is more complex than the Assessee. The technical and performance related obligations and risks associated with the BTG supply are solely with the AE, whereas the Assessee is only selling the equipment supplied by AE as it is on high-sea sale to the customer under the supply contract entered with customer. The activity of AE is highly complex and .....

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ng a consistently loss making. • The TPO ought to have appreciated that the entire search process applied by It Is rendered inconsistent for the fact that there exists different year ending for the comparables and the tested party. • The TPO has erred in not adopting consistent and basic filters in the search process and there by arriving at functionally dissimilar comparable to the AE. The TPO ought to have appreciated the fact that the comparables selected by the TPO are engaged in d .....

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for its comments, which has not been submitted till date. In the absence of the same, directions are issued based on information already available on record. The assessee has submitted FAR analysis of itself and its AE, in relations to international transactions on account of work contract expenses. It is very interesting to note that similar analysis was done by the TPO for the previous year i.e. 2011- 12 in the same manner, which was not objected to by the assessee. The TPO further points out .....

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of the TPO and rejecting contentions of the assessee. 7.6 Aggrieved by the order of DRP, the assessee is in appeal before us. 7.7 Ld. AR of the assessee submitted that the tested party for bench marking a transaction should always be the Indian assessee and not the foreign entity. He submitted that selecting foreign tested party is difficult and each year is independent and to be assessed independently. Without prejudice to the above, ld. AR submitted that a persistent loss making company namel .....

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on the orders of TPO/DRP. 7.9 Considered the rival submissions and perused the material facts on record. The ld. AR has brought on record the financial results declared by JEP Holdings Ltd., which are reproduced below for the sake of convenience: Particulars 2014 2013 2012 2011 Operating Revenue 39.3 29.5 27.8 19 Operating Cost 40.8 30.2 28.6 21.9 OP -1.5 -0.7 -0.8 -2.9 OP/OC -3.68 -2.32 -.2.80 -13.24 OP/OR -0.04 -0.02 -0.03 -0.15 As this comparable company is consistently making losses over th .....

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moving the above from comparables, in case the final ALP is within the +/- 5% range, claim of the assessee may be accepted. CORPORATE TAX MATTERS 8. Ground No. 4a to 4i relate to addition of ₹ 88,51,02,720/- on account of sub-contract expenses. 8.1 The AO observed that during the course of hearing, the assessee company had submitted the copies of RA bills, work orders, etc. and on verification of the same, the AO was of the view that the same were not amenable for verification after lapse .....

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RP, it held that mere certificate without supporting evidence to indicate the expenditure had been incurred would not substantiate the claim of the assessee and the onus of discharging the claims or evidence in support of its contentions had not been met by the assessee and relying on the earlier decision, DRP upheld the action of the AO. 8.3 Aggrieved by the order of the DRP, the assessee is in appeal before us. 8.4 Ld. AR of the assessee submitted that AO may be directed to accept the sub-cont .....

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for AY 2011-12 in ITA No. 450/Hyd/2016 (assessee s own case) 2. CIT Vs. S. Khader Khan Son, [2012] 25 Taxmnn.com 413 (SC) 3. Gajjam Chinna Yellapa Vs. ITO, [2015] 59 Taxmann.com 69 4. Bholanath Polyfab, 355 ITR 290 (Guj.) 5. Simith P Sheth, 356 ITR 451 (Guj._) 6. ITO Vs. Growel Eneregy Co. Ltd., [2014] 47 Taxmann.com 371 (Mum. Trib.) 8.5 Ld. DR, on the other hand, relied on the orders of AO and DRP. 8.6 Considered the rival submissions and perused the material facts on record. Similar issue aro .....

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o assessee. There is also justification in assessee s claim that AO erred in disallowing the amount of subcontract expenditure, including service tax which was never claimed as expenditure to an extent of ₹ 11,31,32,746/. This contention is also required to be examined. Question of disallowance of an amount which was not claimed should not arise. Consequently, without relying on the so called statements which has no evidentiary value considering that no action was taken either in those com .....

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actor a small percentage of the expenditure can be estimated for disallowance, following the principles laid down by the Coordinate Benches as relied upon above. In that event, AO is directed to disallow only a certain percentage of the above amount, if necessary. The addition made is accordingly deleted and the issue of examination of impugned sub contract payments is restored to AO to consider afresh as directed. Grounds are considered allowed for statistical purposes. As the issue under consi .....

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restored to AO to consider afresh as directed. Grounds are considered allowed for statistical purposes. 9. Ground No. 5a to 5C relate to disallowance of loss on account of foreign exchange fluctuation of ₹ 1,19,18,79,013/-. 9.1 The AO noticed that the said claim had been made as additional claim during the course of assessment proceedings by the assessee, which was not accepted by the AO and made the addition. 9.2 When the assessee raised objection before the DRP, the DRP upheld the additi .....

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revised return within the prescribed time u/s.139(5), neither the appellant Is entitled to raise such claim after the prescribed time before the Assessing Officer nor the Assessing Officer is empowered to entertain such claim. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Goetze India Ltd and the latest High Court decision of the Honourable Orissa High Court in the case of Orissa Rural Housing Development Corporation Ltd vs The Asst. Commissioner of Income Ta .....

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ered to deal with the issues arising out of variation to returned income or loss and therefore the same cannot be considered by the Panel and is rejected. 9.3 Aggrieved by the order of DRP, the assessee is in appeal before us. 9.4 The ld. AR of the assessee requested the bench to allow the claim of foreign excahange loss of ₹ 1,19,18,79,013/- due to the following: • The Courts have directed tax officers to allow the relief even if it has been claimed for the first time during the asse .....

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laim during the course of assessment proceedings and is entitled to claim the deduction which was not claimed in the original or revised return. He relied on the following case law: 1. Mahindra & Mahindra Ltd., Vs. Addl. CIT [2013] 40 Taxmann.com 522 (Mum. Trib.) 2. Aban Offshore Ltd. Vs. DCIT, ITA No. 450/Mds/2017 Ld. AR submitted that foreign currency loss incurred on revenue account shall be allowed as revenue expenditure. For this proposition he relied on the decision in the case of CIT .....

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o consider this issue, but refused to entertain it on the reason that it was not before the TPO/AO. In our opinion, all the facts are available on record and assessee made a claim, it is appropriate to remit the issue to the file of AO for his consideration. In view of the judgment of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (229 ITR 283), wherein it was held that a legal ground can be raised at any stage of appeal. Further, the Co-ordiante Bench in the case of M/s. Ab .....

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