TMI Blog2018 (10) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... is for securing the assessee against any fluctuation loss in foreign currency and service of loan by means of interest. Thus, it is clear that the provisions of section 43(5) of the Act are clearly not attracted. Interest component on ECB - Held that:- As the loan was taken, admittedly, for the business purpose, interest thereon, which is a part of the overall compensation to the banks, thus has to be allowed as deduction. As tax was properly deducted on such interest component and paid to the exchequer, we hold that the ld. CIT(A) rightly appreciated the facts in deleting addition of ₹ 2.67 crore. Premium on hedging contract - Held that:- the deductions have already been allowed by the Assessing Officer in the preceding three years, which assessments have attained finality. To that extent, there will be double deduction in the fifth year, which cannot be permitted. We, therefore, hold that the assessee was justified in claiming deduction of the proportionate part of the Premium on year to year basis. TDS liability - Held that:- Having issued certificates u/s 195(3) of the Act to the two banks, the Revenue was not within its power to require deduction of tax at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the financial year 2002-03. In order to hedge itself against foreign currency fluctuation in JPY, the assessee entered into agreements with Citi Bank NA and Barclays Bank Plc. As per the agreement with Citi Bank, the assessee sold JPY 1768500000 for ₹ 715087500 and agreed to pay the same amount paid for purchasing JPY 1768500000 at the time of maturity. Citi Bank undertook to pay interest @ 1.7% on JPY 1768500000 on behalf of the assessee to SCJ Europe BV and the Citi Bank agreed to charge ₹ 34,91,20,000/- from the assessee for paying interest to SCJ Europe BV and bearing the foreign exchange fluctuation. Similarly, on identical terms, the assessee entered into another agreement with Barclays Bank, wherein it sold JPY 2358600000 for ₹ 95,30,00,000/- and agreed to pay the same amount to be paid for purchasing JPY 2358600000 at the time of maturity. Barclays Bank undertook to pay interest @ 1.7% on JPY 2358600000 on behalf of the assessee to SCJ Europe BV. The Barclays Bank agreed to charge ₹ 46,55,40,500/- from the assessee for paying interest to SCJ Europe BV and bearing foreign exchange fluctuation risk. The assessee furnished copies of the agreements ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed to charge a fixed amount of ₹ 34,91,20,000/- and ₹ 46,55,40,500/- respectively. The ld. AR explained that total sum of ₹ 81,46,60,500 (Rs.34,91,20,000/- plus ₹ 46,55,40,500/-) payable by the assessee to the two banks was determined on the basis of interest and hedging risk to be served by the banks during the period of five years. In other words, it was explained that the sum payable was dependent upon the period for which the risk was undertaken, that is, higher the period, higher the amount of compensation to the banks and vice versa. Thus, it follows that both the banks undertook to serve the loan in two ways, viz., firstly, by paying interest on loan at 1.70% to the lender and hedge the assessee from any foreign currency fluctuation in Japanese Yen. Since the loan was taken in the financial year 2002-03 and was to be repaid after five years, it was at that initial time that the assessee entered into agreements with the two banks and then spread over the amount of Premium payable to these two banks over a period of five years. The amount relatable to the year under consideration is ₹ 16.29 crore, which has interest component of ₹ 2.67 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As the loan was taken, admittedly, for the business purpose, interest thereon, which is a part of the overall compensation to the banks, thus has to be allowed as deduction. As tax was properly deducted on such interest component and paid to the exchequer, we hold that the ld. CIT(A) rightly appreciated the facts in deleting addition of ₹ 2.67 crore. 6. Next is the other component of Premium on hedging contract at ₹ 13.61 crore. We have noted above that the assessee took loan in the financial year 2002-03 which was repayable after a period of five years and thus entered into agreements with the banks fixing the final exchange date as 25.03.2008. The ld. CIT(A) held the amount to be otherwise deductible, which finding has not been challenged by the Revenue in its appeal. He, however, opined that such amount was to be allowed as deduction at the time of settlement which event was to take place in the succeeding year, that is, 2008. This shows that the otherwise deductibility of the Premium is not under challenge. What is under challenge is the timing of allowing deduction. We have noted supra the uncontroverted contention of the ld. AR that the amount of compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proportionate basis. The assessee claimed similar proportionate deductions in preceding three years which were allowed by the Assessing Officer himself. If now we hold to allow deduction for the entire amount at the end of the fifth year, as has been held by the ld. CIT(A), it would mean that the entire amount would have to be allowed at the end of the fifth year. As against that, the deductions have already been allowed by the Assessing Officer in the preceding three years, which assessments have attained finality. To that extent, there will be double deduction in the fifth year, which cannot be permitted. We, therefore, hold that the assessee was justified in claiming deduction of the proportionate part of the Premium on year to year basis. 8. Now comes the question of disallowance u/s 40(a)(ia) in respect of such premium. The Assessing Officer held that the amount was disallowable for the failure of the assessee to withhold tax at source at the time of booking the expenditure in its accounts. Even having crossed the otherwise deductibility of the amount, deduction can actually be allowed only if the assessee has either rightly deducted tax at source or the amount is foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 out of total deduction claimed u/s 80IB of the Act. 11. The facts apropos this ground are that the assessee claimed deduction u/ss 80IB and 80IC of the Act amounting to ₹ 9,10,68,686/- and ₹ 63,69,15,825/- respectively. The assessee claimed deduction u/s 80IB on the net income of Unit Nos. 2 and 3, both at Baddi, Himachal Pradesh and deduction u/s 80IC on income from Unit Nos. 4 and 6, both at Guwahati. There is no dispute insofar as deduction u/s 80IC is concerned. The Assessing Officer observed that another Unit i.e., Unit 1 was fully functional in Baddi which, admittedly, did not qualify for tax holiday. He deputed Inspector of his charge for spot inquiry to know about the manufacturing process at the three Units in in Baddi. The Inspector visited the Units and reported that the Unit 1 is engaged in the production of heaters only which, after final assembly and testing are transferred to Unit Nos.2 and 3; Unit 2 is engaged in the production of refills containing the chemical of mosquito repellants and gets the supply of heaters from Unit 1; Combo packs containing refill and heater are then packed from this Unit for sale ; an Unit no. 3 is engaged in the produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raising composite invoices. It is found that Unit No. 1 is sending its output to Unit Nos. 2 and 3 at a particular excisable value. Similarly, Unit Nos. 2 and 3 also determine the excisable value of their output. In the absence of any other rational basis for allocating income to the Unit 1 from the combined income of Units nos. 2 and 3, we are satisfied that the ratio of the excisable value of the output of Unit 1 vis- -vis that of Units 2 and 3 will constitute a good basis for bifurcation of income. We hold accordingly and direct the Assessing Officer to first find out the amount of profit from sales made by Unit No. 2. Then, find out separate excisable value of goods transferred from Unit No. 1 to the Unit No. 2. The total profit of Unit 2 should be apportioned to Unit no. 1 in the ratio of excisable value of goods in Unit 1 as total of excisable value of Units 1 and 2. Similar exercise should be done for determining the share of income of Unit 1 in the income of Unit no. 3 separately. 14. Ground No.2 of the Revenue s appeal has been worded as directed against deletion of addition of ₹ 48,05,198/- made by the Assessing Officer on account of sale of mutual funds, thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of disallowance of ₹ 1,32,15,178/- made by the Assessing Officer on account of damages and shortages. The assessee claimed deduction on account of shortages and damages to the tune of ₹ 1.32 crore in its Profit Loss Account, which the Assessing Officer did not allow. The ld. CIT(A) concurred with the assessee s submissions and allowed such deduction. 17. Having heard both the sides and perused the relevant material on record, it is seen that the assessee made a turnover of more than ₹ 300 crore and the damages are only ₹ 1.32 crore. There is no double deduction as made out by the Assessing Officer. Such deduction of ₹ 1.32 crore is towards abnormal loss. Considering the entirety of facts and circumstances of the instant case, we are satisfied that the ld. CIT(A) was justified in deleting this addition. We, ergo, countenance the view taken by the ld. CIT(A) on this issue. 18. The last ground of the Revenue s appeal is against restricting the disallowance made by the Assessing Officer u/s 14A to 1% of the dividend income. The Assessing Officer applied the provisions of Rule 8D and computed disallowance accordingly u/s 14A. The ld. CIT(A) hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2007-08. 23. While disposing off the appeals of the assessee and Revenue for the assessment year 2007-08, we have held that both the interest and Premium components are deductible and, further, the provisions of section 40(a)(ia) are not attracted. The ld. AR has pointed out that certificates u/s 195(3) have been issued to both the banks for this year as well on the same lines. In view of the foregoing, it becomes clear that the assessee is eligible for deduction of ₹ 15.26 crore. The grounds taken by the Revenue are, therefore, dismissed. As regards the assessee s claim, we find that the same has become infructuous in view of our decision in allowing such deduction in the preceding year itself. 24. Ground No.2 of the assessee s appeal is against the confirmation of disallowance of deduction u/s 80IB in respect of Unit No.3. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of the preceding year. Following the view taken hereinabove, we hold that the assessee cannot be allowed deduction u/s 80IB in respect of income arising from the manufacturing of Unit-I. The computation part is directed to be re-done in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X
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