TMI Blog2020 (5) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of provision for gratuity to book profit u/s 115JB - HELD THAT:- Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case [ 2018 (3) TMI 423 - ITAT DELHI] we are of the considered view that by now, it is settled proposition of law that when provision for gratuity is being made on the basis of actuarial valuation, it cannot be said to be an unascertained liability and added in terms of clause (c) of section 115JB of the Act and as such, the said amount would not be added to the net profit. So, we find no illegality or perversity in the deletion made by the ld. CIT (A), hence ground no.2 of Revenue s appeal is deleted. Addition u/s 14A read with Rule 8D - disallowance under the normal provisions of the Act as well as u/s 115JB - CIT (A) contended that since the taxpayer has suo motu disallowed u/s 14A of the Act on account of expenses incurred to earn the dividend income of ₹ 7,47,820/-, no further disallowance can be made as the AO has not recorded any satisfaction if the working given by the taxpayer is not correct - HELD THAT:- This issue is also required to be restored to AO to decide afresh in view of the decision relied upon by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 501/Del./2014, ITA Nos.1638/Del./2014 - - - Dated:- 14-5-2020 - Shri R.K. Panda, Accountant Member And Shri Kuldip Singh, Judicial Member For the ASSESSEE : Shri Sandeep Sapra, Advocate For the REVENUE : Ms. Shashi Kajle, Senior DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Present cross appeals filed by the assessee as well as by the revenue are being disposed off by way of composite order to avoid repetition of discussion. 2. Appellant, DCIT, Circle 2 (1), New Delhi (hereinafter referred to as the Revenue ) by filing the present appeal sought to set aside the impugned order dated 03.02.2014 passed by the ld. Commissioner of Income-tax (Appeals)-XX, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2008-09 on the grounds inter alia that :- 1. Whether on the facts and in the circumstances of the case, the Lcf CIT(A) has erred in deleting the adjustment made by the TPO while determining the Arm's Length Price of Royalty paid of ₹ 2,20,00,000/- crores for the Taloja Plant as NIL inter alia holding that the plant had received patented technology and support for manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fly stated the facts necessary for adjudication of the controversy at hand are : M/s. Asahi India Glass Limited, the taxpayer was established in the year 1987 for manufacturing of high quality automotive glass for the Indian automobile industry. Subsequently, the taxpayer also forayed into manufacturing of architectural and float glass. During the year under assessment, the taxpayer had 3 lines of business viz. auto glass, float glass and architectural glass but due to low sales volume in the architectural glass segment, this segment was aggregated with auto glass division and consequently organized its business into 2 strategic business units of auto glass and float glass. 5. During the year under assessment, the taxpayer was an associate of Asahi Glass Company, Japan (AGC Japan) with the latter holding 22% shares of the taxpayer. AGC Japan has appointed one Executive Director on the Board of the taxpayer which was also Chief Technical Officer of the taxpayer and as such, AGC Japan was considered a deemed Associated Enterprises (AE) of the taxpayer and consequently all the subsidiary of AGC Japan were considered as AE of taxpayer. 6. During the year under assessment, taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxpayer company, the ld. TPO extended benefit of the royalty agreement pertaining to Roorkee plant. However, in case of Taloja plant of the taxpayer company shows operating profit margin of (-) 0.04% which proves that licence technology availed by this plant has failed to generate any economic value for the taxpayer s business and ordered to reduce the amount of ₹ 2,20,00,000/- to nil by using CUP method in the absence of any evidence to show that if any benefit has accrued to the taxpayer and thereby enhanced the income of the taxpayer by ₹ 2,20,00,000/-. 8. AO made a disallowance of ₹ 9,63,964/- u/s 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (for short the Rules ) under the normal provisions of the Act and u/s 115JB of the Act. AO also made addition of ₹ 16,70,000/- by following the Instruction No.3/2010 dated 23.03.2010 of CBDT by way of making disallowance on account of mark to market basis on the ground that the same has been booked as expenditure as forward contract. AO also made addition of 84,93675/- under the normal provisions of the Act and also u/s 115JB on the ground that the provision made by the taxpayer for payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55,695 Segment result -108 2,240 2,132 Operating Profit / Sales -0.40 9.86% 4.27% 13. It is also not in dispute that from the Tajola plant, the taxpayer makes an operating profit margin of (-) 0.40% thus failed to generate any economic value of the licensed technology to its business. 14. Ld. CIT (A) deleted the addition of ₹ 2,20,00,000/- on account of adjustment made by the ld. TPO in order to determine the ALP of royalty by returning following findings :- 11.7 The appellant has highlighted that the Asahi brand and associated technology is quintessential for its continued existence and sustenance in the float glass industry. In this connection, the appellant has submitted that the technology and know-how of float glass is only restricted to Asahi Glass, Saint Gobain and Guardian. The appellant has also explained that all the players in the float glass industry would be licensing the technology and know-how of their respective group companies for the production and sale of fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO made an addition ₹ 4.09 crores to the total income of the assessee by disallowing payment of royalty by the assessee to its AE being at arm s length price. We find the ld. CIT(A) deleted the addition made by the AO/TPO, the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of the ld. CIT(A) on this issue. We find the assessee before the TPO had given analysis of the comparables with an average/mean margin of 8.66%. The details of which are as under :- Company Name Sales (Cr.) Total cost (TC) (Cr.) Operating Profit (OP) (Cr.) OP/Sales %age 1) Bharat Glass Tube Ltd. 41.36 40.08 0.56 1.35% 2) Gujarat Guardian Ltd. 484.63 359.3 125.33 25.86% 3) Hindustan National Glass Inds. Ltd. 596.17 531.06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05 and 2005-06. Further, the royalty paid by the assessee to AE for float glass technology has been accepted by the Department in the earlier years. We also find merit in the submission of the ld. counsel for the assessee that since the assessee is a public limited company with only 22.21% shareholding by its AE and Indian promoters holding 33.03% and the general public holding 44.76%, therefore, the AEs were not in a position to wield significant influence over assessee s business as its performance and commercial expediency were subject to intense scrutiny by shareholders of the companies which are listed on BSE and NSE. We further find the Revenue has accepted the royalty paid at the rate of 3% by Sona Steering Systems Ltd. to its AE which is much more than 1.71%. Further, in the immediately preceding year 2006-07, the Tribunal had directed the TPO to include Bharat Glass Tube Ltd. and Triveni Glass Ltd. as comparables. If these two companies are included as comparables, the average margin comes to 1.39% which is much less than the operating margin of 6.02% of the assessee company. 48. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it is not the duty of the ld. TPO to advise the taxpayer company as to how the business affairs are to be run. So, when the taxpayer has successfully proved that it has received patented technology and support for the manufacturing of float glass from AGC Japan in lieu of royalty payment, the same cannot be disallowed on the basis of conjectures and surmises. So, ld. CIT (A) has rightly deleted the addition made by the AO/TPO, hence ground no.1 of Revenue s appeal is determined against the Revenue. GROUND NO.2 OF REVENUE S APPEAL (ITA No.2501/DEL/2014) 19. Ld. CIT (A) deleted the addition of ₹ 84,93,675/- made by the AO on account of provision for gratuity to book profit u/s 115JB of the Act. 20. Ld. DR for the Revenue by relying upon the order passed by the AO contended that when the provision for gratuity has been made on the basis of actuarial and actual payment of gratuity is deferred to a later date on the happening of a certain event, namely, death or voluntary retirement of the employees which are unascertained events, the provisions made by the taxpayer is for ascertained liability, AO has rightly added back the same to the book profit of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that by now, it is settled proposition of law that when provision for gratuity is being made on the basis of actuarial valuation, it cannot be said to be an unascertained liability and added in terms of clause (c) of section 115JB of the Act and as such, the said amount would not be added to the net profit. So, we find no illegality or perversity in the deletion made by the ld. CIT (A), hence ground no.2 of Revenue s appeal is deleted. GROUND NO.1 OF ASSESSEE S APPEAL (ITA NO.1638/DEL/2014) 24. AO by invoking the provisions contained u/s 14A read with Rule 8D made a disallowance of ₹ 9,63,964/- under the normal provisions of the Act as well as u/s 115JB of the Act which has been confirmed by the ld. CIT (A). 25. Ld. AR for the taxpayer challenging the impugned order passed by the ld. CIT (A) contended that since the taxpayer has suo motu disallowed an amount of ₹ 2,96,016/- u/s 14A of the Act on account of expenses incurred to earn the dividend income of ₹ 7,47,820/-, no further disallowance can be made as the AO has not recorded any satisfaction if the working given by the taxpayer is not correct and relied upon the decisions rendered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) Aggregate amount 40 c) Number of sell contracts 6 d) Aggregate amount 60 30. AO disallowed the gross MTM loss of ₹ 16,70,000/- by relying upon Instruction No.3/2010 dated 23.03.2010 by treating MTM loss as a notional loss being contingent in nature. 31. Coordinate Bench of the Tribunal in the case of DCIT vs. Bank of Bahrain Kuwait 132 TTJ 505 decided the identical issue by returning following findings :- 56. The controversy stands now resolved in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd., 116 ITR 1 (SC), wherein, it has been held that fluctuation on account of foreign exchange rate is an allowable deduction and is not capital in nature. The observation of the Hon ble Supreme Court is as under:- The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Woodward Governor India (I) P.Ltd., the assessee s claim is allowable. viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. 59. We, accordingly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. 32. So, following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view inter alia that when MTM gain of ₹ 10,60,000/- is being taxed by the department in respect of such unmatured forward foreign exchange contracts then there was no ground to disallow the loss as claimed by the taxpayer in respect of the same contracts on the same footing. The entire detail is there on record. Even otherwise, the obligation accrued against the taxpayer the minute it entered into forward foreign exchange contracts. So, the forward foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which is extracted as under :- Pursuant to Accounting Standard (AS)-11 notified as part of Companies (Accounting Standards), Rules 2006 exchange rate fluctuations arising on loans/liabilities incurred for acquisition of Fixed Assets (other than capital projects under progress) are recognized in the Profit and Loss Account which were hitherto capitalized. Due to above change, the profit for the year is higher by ₹ 39.08 Lac. 36. So, in view of AS-11 and section 43A of the Act, foreign currency gain of ₹ 39,08,11,373/- on account of fluctuation being notional gain was credited to P L account and reduced from taxable income as the same could not be construed as real income. 37. The coordinate Bench of the Tribunal in the case of Vodafone East Ltd. Ors. vs. ACIT 156 ITD 337 by relying upon the decision rendered by Hon ble Supreme Court in case of CIT vs. Woodward Governor of India Pvt. Ltd. 312 ITR 254 decided the identical issue in favour of the taxpayer by returning following findings :- We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove are un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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