TMI Blog2022 (2) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 12% calculated based on the average rupee cost comparing the same with SBI prime lending rate. The assessee's claim in this ground is allowed. Disallowance of expenditure u/s. 14A r.w Rule 8D - HELD THAT:- Disallowance made u/s. 14A of the Act ought to be deleted, since the assessee was not in receipt of any exempt income during the relevant assessment year - we allow this ground in favour of the assessee to hold that the disallowance made u/s. 14A is to be deleted as the assessee was not in receipt of any exempt income during the relevant assessment year. Disallowance u/s 37 - foreign exchange fluctuation loss incurred in respect of loans availed - HELD THAT:- We have perused the RBI approval letter where it is clearly stated that the loan is required to be used only for the purpose for which it is approved that is the general corporate purposes - cash flow statement does not provide any basis to the finding that the amount is used for the repayment of short term loans unless there is a thorough examination is done on the inflows and outflows in the cash flow statement. We also take into consideration the fact that the assessee has offered the forex gain in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against the order of the AO, LTP, Circle-1, Bengaluru dated 30/9/2016 passed u/s. 143(3) r.w.s 144C of the Income-tax Act 1961 (the Act) for the assessment year 2012-13. 2. The assessee has raised over all 22 grounds and several sub grounds. i) Grounds 1 and 2 are general nature ii) Grounds 3 to 9 relate to payment of royalty iii) Grounds 10 to 15 relate to payment of interest on compulsory convertible debenture. iv) Ground 16 is with regard to disallowance of expenditure u/s. 14A r.w.R 8D of the Act. v) Ground 17 is with regard to foreign exchange loss vi) Ground 18 with regard to Disallowance of expenditure u/s. 40a(ia) vii) Grounds 19, 20 and 22 are not pressed by the assessee viii) Ground 21 is consequential in nature. 3. The brief facts of the case The assessee is a company engaged in the business of manufacture and sale of industrial gases and construction of air separate units. The assessee is a subsidiary of M/s. Praxair India Ltd., Mauritius. The assessee filed its return of income for the asst. year 2012-13 on 29/11/2012 admitting a total loss of Rs. 63,15,18,190/-. The assessee company during the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,42,35,783 made on the basis of suo moto disallowance made in the earlier financial year 2009-10 under section 40(a) of the Act was recharacterized as disallowance under section 37 of the Act 9. The first issue we will take up the transfer pricing adjustment made by the TPO with respect to payment of royalty @ 1%. 10. The ld. AR submitted that this issue is covered in assessee's own case in ITA No. 506/Bang/2016 vide order dated 6/12/2021 for the asst. year 2011-12 wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 11. The ld. DR relied on the written submissions. 12. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee's own case (Supra) has held that- 7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2009-2010 in IT(TP)A No. 315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No. 361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of ALP for payment of royalty to the files of the TPO. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s length. Accordingly ground 3 is allowed. 13. Considering the decision of coordinate Bench in assessee's own case (supra) we allow this ground in favour of the assessee and hold that payment of royalty @ 4% is at arm's length. 14. The next issue is the adjustment made by the TPO with regard to payment of interest on compulsory convertible debentures (CCDs) by re-characterizing the same to be External Commercial Borrowings (ECB). 15. The Ld. AR submitted that this issue is also covered in assessee's own case (supra) wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 16. The ld. DR supported the decision of the lower authorities. 17. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee's own case (Supra) on the issue of interest on CCDs has held that- 8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International Finance. In the agreement, the term issue price is defined as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated. i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum/2014; ii, CIT Vs. Cotton Naturals (I) Ltd., ITA No. 23312014 (Deli-HC); iii. M/s. Brahma Center Development Pvt. Ltd., Vs. [TO, ITA No. 373/Del/2016 (ITAT Del). By respectfully following the Co-ordinate Bench and Hon'ble High Court decisions, we agree with the assessee 's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case. 8.6.2 The Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- 39. The question whether the interest rate prevailing in India should be applied, for the lender was an In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed the appeal in favour of the assessee. 21. We have heard the Ld. DR and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee's own case (Supra) has held that- 9.2 We have heard rival submissions and perused the material on record. It is an undisputed fact that the assessee did not earn any exempt income during the year under consideration. It is a settled position that in the absence of any exempt income, no disallowance can be made u/s. 14A of the Act. In this context, reliance is placed on the judgment of the Hon'ble jurisdictional High Court in the case of CIT and Anr. v. Quest Global Engineering Services Pvt. Ltd. (supra), wherein it was held as follows:- 14. Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No. 5/2014 dated 11.02.2014 is not applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes upon order to earn profits. In the result, the appeals filed by the revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 15. From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP IN VESTMENT LTD. supra deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of Section 14A in MIS NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi), in such a case disallowance of expenditure under section 14A of the Act would not be permissible. The decision of Delhi High Court was carried in the appeal by the revenue. The SLP has been dismissed by the Supreme Court. 9.4 In the light of the aforesaid judicial pronouncements the disallowance made u/s. 14A of the Act ought to be deleted, since the assessee was not in receipt of any exempt income during the relevant assessment year. 22. Considering the binding effect of the decision of the coordinate bench of the Bangalore Tribunal we allow this ground in favour of the assessee to hold that the disallowance made u/s. 14A is to be deleted as the assessee was not in receipt of any exempt income during the relevant assessment year. 23. The next issue for consideration is Disallowance of foreign exchange loss amounting to Rs. 20,22,99,856/-. 24. The assessee obtained a foreign currency loan from Kelvin Finance Company and the borrowing was to be used for 'general corporate purposes'. The assessee has obtained an approval from the Reserve Bank of India (RBI) for remitting the interest and the principal amount. The RBI vide letter dated 20.05.2003 grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable deduction. vii. in the previous assessment years when the Appellant had realised gains in respect of the said loan, the same were offered to tax, which was accepted by the Revenue. The Revenue having accepted the gains to tax, and thereby having accepted the loans to be obtained for working capital purposes, cannot disallow the loss in the year under consideration. 27. The ld. DR relied on the written submissions. 28. We have heard both the parties and perused the material on record. It is a settled law that if the loan borrowed is utilized for revenue purposes, the forex loss arising against the loan should be allowed as a deduction. The Apex court in the case of CIT vs Woodward Governor (supra) has settled the issue and the coordinate bench of the Bangalore Tribunal has been consistently following the same view. The coordinate bench of the Bangalore Tribunal in the case of ITO vs Levi Strauss (India) Pvt. Ltd. (ITA Nos. 2547 2548/Bang/2018) has held that 9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We are of the considered view that the cash flow statement does not provide any basis to the finding that the amount is used for the repayment of short term loans unless there is a thorough examination is done on the inflows and outflows in the cash flow statement. We also take into consideration the fact that the assessee has offered the forex gain in respect of the same loan in the previous year and in the interest of justice it is only correct when the loss arises out of forex movement the same be allowed. Pursuant to the binding decision of the coordinate bench of the Bangalore Tribunal and based on the facts placed before us we hold that the loss claimed by the assessee due to the forex fluctuation of the loan is to be allowed. This ground is allowed in favour of the assessee 30. The next issue raised by the assessee is with regard to disallowance of expenditure u/s. 40a(ia) of the Act for Rs. 5,42,35,783/- 31. During the asst. year 2011-12, the assessee suo moto disallowed a sum of Rs. 5,42,35,783/- for non deduction of tax at source u/s. 40a(ia). The AO re-characterized the same as a disallowance u/s. 37 of the Act in assessee's own case (Supra). The coordinate b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. can certainly re-characterize the same as not allowable expenditure u/s. 37 of the Act. However, as mentioned earlier, the A.O. nor DRP has not examined whether the said expenditure is allowable business expenditure u/s. 37 of the Act. The A.O. held that provision of Rs. 5,42,35,783 disallowed by the assessee u/s. 40(a)(ia) of the Act cannot be allowed as deduction in the subsequent assessment year, since, the expenditure does not pertain to the subsequent year. The DRP did not adjudicate the issue by observing that there is no variation to the returned income on this count. Therefore, the matter needs to be reconsidered by the AO afresh. It is ordered accordingly. 36. The Tribunal has given a clear direction that the allowability of the impugned expenditure in 2011-12 or in the year under consideration needs to be reconsidered by the AO afresh. Respectfully following the decision of the coordinate bench of the Bangalore Tribunal we remand the claim of the assessee back to the AO and AO is directed accordingly. The appeal of the assessee on this ground is allowed for statistical purposes. 37. In the result, the appeal of the assessee is allowed. Order pronounced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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