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TMI Blog2022 (2) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of foreign exchange fluctuations (h) Disallowance of interest expenditure payable to Micro, Small and Medium Enterprises. (i) Non-granting of set off of brought forward business loss and unabsorbed depreciation. 3. The assessee company is primarily engaged in the business of manufacturing and trading of crop protection chemicals, viz., insecticides, herbicides, fungicides and also in plant growth regulators. It gets all its products manufactured from third party contractors/toll manufacturers. The assessee imports chemicals and formulations (raw materials) from its AE, M/s FMC Corporation, USA. 3.1 The assessee sells its finished products to third parties in India and also resells the chemicals and formulations imported from FMC Corporation, USA. The assessee also imports raw materials (Lithium Metal) and finished goods for trading from FMC Corporation, USA and FMC Chemicals Ltd, UK. The assessee also provides certain support services to the various divisions of FMC. The assessee also provides development services to the API Hong Kong and application support services to the Health & Nutrition (Pharma) division of FMC Corporation, USA. The support services provided by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irection given by Ld DRP, the T.P adjustment came to be Rs.24.63 crores. 4.4 Though the assessee has raised many grounds in respect of transfer pricing adjustment, the Ld. A.R. submitted that he is pressing Ground no.2.6 and Ground No.2.10 only. Accordingly, the remaining grounds relating to transfer pricing adjustment are dismissed as not pressed. In Ground No.2.6, the assessee seeks exclusion of 3 companies namely (a) HPM Chemicals & Fertilizers Ltd. (b) Bharat Insecticides Ltd. (c) Lokmangal Bio-Tech Pvt. Ltd. However, the Ld. A.R. did not press M/s. Lokmangal Bio-Tech Pvt. Ltd. at the time of hearing. Accordingly, the assessee seeks exclusion of only two companies. In Ground No.2.10, the assessee is contending that the transfer pricing adjustment should be restricted to the international transactions entered with the associated enterprises only. 4.5 We shall first take up Ground No.2.10. With regard to the plea of the assessee to restrict the transfer pricing adjustment to international transactions entered with A.E only, the Ld. A.R. placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Hindustan Unilever Ltd. Vs. ACIT (2012) 28 Taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fertilizers and running a pulverizing mill. However segmental results have not been given. In respect of fertilizers business, this company has received subsidy towards freight as well as for sale of imported fertilizers. All these facts in our view makes this company not comparable with the assessee company. Accordingly, we direct the A.O./TPO to exclude this company. 4.10 The assessee also seeks exclusion of M/s. Bharat Insecticides Ltd. the ld. A.R. submitted that this company is dealing in diversified products, viz., pesticides, plant growth regulators, etc. Further, this company also acts as toll manufacturer i.e. doing job work for other companies. He submitted that TPO has wrongly understood that the assessee herein is also engaged in toll manufacturing, whereas the fact remain the assessee gets his product processed/manufactured by other toll manufacturers. He submitted that this company also does not have segmental results. Accordingly, he submitted that this company cannot be considered as a comparable to the assessee. 4.11 We heard Ld. D.R. on this comparable and perused the record. The annual report of the company pertaining to assessment year 2014-15 (F Y 2013-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arguments made by the AO are very precise and valid. The fact remains that the so called R & D activities being claimed are being done for the parent company. Hence, the benefit, if any, will eventually will go to the parent company. As per Master Agreement with the AE, all know-how, technology and technical information developed by FRIL (the assessee) in conducting any work for FMC-API hereunder whether or not patentable, shall be owned and/or controlled exclusively by FMC-API (AE). The assessee has not shown that because of the research done by it, it has got patents in its name. As far as the assessee is concerned, it is a work being carried out at the instruction, direction and supervision of the patent company and that work incidentally happens to be related to R & D. This is an incentive given to Indian companies to encourage investment in R & D and not for doing work for some company located abroad. Therefore, we approve of the disallowance u/s 35(1)(iv). As far as depreciation u/s 32 also, we note that as per the Masters Agreement the assessee would not be able to claim ownership over the research and development undertaken by it. In the circumstance, the assessee would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike deduction u/s 35(1)(iv) are given by the Government to encourage Indian Companies and not for doing work for some company located abroad. Accordingly, we are of the view that the tax authorities are justified in disallowing the claim for deduction of Capital expenditure u/s 35(1)(iv) of the Act. 5.6 Since the disallowance of capital expenditure is upheld by us, the assessee would be eligible for depreciation on them at applicable rates. We notice that the AO has disallowed only the WDV amount of Rs.1,86,04,299/- claimed by the assessee after deducting the depreciation of Rs.23,94,873/- claimed in the books of account. The AO may examine the claim of the assessee for allowing correct amount of depreciation, if the above said claim is not in accordance with the rates prescribed under the Income tax Rules. 6.0 The next issue relates to the disallowance of payroll expenses u/s 40(a)(i) of the Act.The AO noticed that the assessee has paid a sum of Rs.97,69,258/- to its AE FMC Corporation, USA as "Payroll expenses" and it did not deduct TDS there from. When enquired, the assessee submitted that the above said sum represented only reimbursement of salary and related cost of an emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical knowledge and hence it cannot fall under the category of 'fee for technical services'. In this regard, he relied upon the decision rendered by Hon'ble Karnataka High Court in the case of Abbey Business Services India P Ltd (ITA No.214 of 2014), wherein identical addition has been deleted by Hon'ble High Court. Accordingly, he submitted that this addition is required to be deleted. 6.2 We heard Ld DR and perused the record. From the observations made by the tax authorities, we notice that the assessee has furnished the agreement, if any, entered between the assessee and the AE/expatriate in connection with the deputation of that employee to the assessee. Further, it is the observation of the tax authorities, the assessee has not explained about the nature of services rendered by the expatriate to the assessee. It is the case of the AO that the expatriate was working on behalf of the AE and hence he might have provided technical services to the assessee on behalf of the AE, even though the assessee refutes the same. Before us, the assessee has submitted that the details of Payroll expenses have been submitted in the paper book. However, what is required to be examined in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim holding it to be notional loss. Though the view taken by the AO may not be right, yet the disallowance has to be confirmed for the reasons discussed above. Accordingly, we confirm the disallowance of Rs.1,03,58,838/- made by the AO. It is not clear as to whether the provisions of sec.43A would apply to the ECB Loan. Hence the assessee may claim the benefit of provisions of sec.43A, if it is applicable to the ECB Loan repayments. 8.0 The next issue relates to the disallowance of Product development expenses of Rs.4,36,88,418/-. The assessee submitted before the AO that it has incurred these expenses with the intention of expanding the existing line of business. The assessee submitted that incurring of this kind of expenses is an integral part of profit earning process and it aids the assessee to continuously improve its portfolio of products. The assessee also relied upon the decision rendered by Chandigarh bench of ITAT in the case of Glaxo Smithkline Consumer Health care Ltd (112 TTJ 94) and also the decision rendered by Hon'ble Karnataka High Court in the case of Bharat Earth Movers Ltd (47 CTR 244) and also by Chennai bench of ITAT in the case of Magnetic Meter Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. Accordingly we restore this issue to the file of AO. 9.0 The next issue relates to disallowance of claim of finance lease charges of Rs.78,41,340/-. The assessee had taken certain vehicles on finance lease and paid lease charges. The assessee claimed the payment of lease charges as expenditure. The assessee did not include the same as its fixed assets in the depreciation schedule and accordingly did not claim depreciation thereon. The AO took the view that the assessee should recognize the assets taken on lease as its capital asset and should have claimed depreciation and finance charges as per Accounting Standard 19 issued by ICAI. He further held that the finance lease gives enduring benefit to the assessee and it cannot be called as operating lease. Accordingly he disallowed the claim for deduction of finance lease charges. In this regard, he took support of the decision rendered by Delhi bench of ITAT in the case of Rio Tinto India (P) Ltd (ITA No.363 (Delhi)/2012 dated 22-06-2012. 9.1 The Ld DRP also confirmed the disallowance. It also held that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Rs.3,77,03,434/- results in double disallowance. However, there is slight difference in the figures. The Loss arising on revaluation of ECB loan was Rs.1,03,58,338/- when we dealt with the issue in the earlier paragraph. However, the loss arising on revaluation of ECB loan was shown as Rs.1,04,19,728/- in the break-up details given above. Hence this difference needs to be reconciled and it has to be shown by the assessee that both the figures pertain to same claim. Accordingly, we direct the AO to examine the claim of double disallowance and delete the double disallowance, if any. 10.4 There should not be any dispute that the realised losses pertaining to revenue account is allowable as deduction. The AO may verify the details and allow the deduction. 10.5 We are unable to understand as to why the assessee did not offer the amount of Rs.88,56,806/- pertaining to Forward contract premium and MTM transaction as its income. Accordingly, we restore this issue to the file of AO for examining this issue. 11.0 The next issue pertains to disallowance of interest expenditure of Rs.10,07,131/- payable to Micro, Small and Medium Enterprises. It is the submission of the Ld A.R, the ..... 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