TMI Blog2023 (11) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us to persuade us to depart from the view taken by the Tribunal in the case of the Assessee for the preceding assessment years on this issue.Thus we do not find any infirmity in the order passed by the CIT(A).Ground No. I II raised by the Assessee are dismissed. TP Adjustment - interest on loan to Associated Enterprises - Assessee voluntary made an adjustment in the computation of total income by computing interest at the rate of 1.53% (i.e. Average US LIBOR + 1%) in case of interest free USD loan to Aditya Birla Minacs Philippines and at the rate of 5.50% in case of interest free CAD loan to AVTL, Canada - HELD THAT:- As decided in assessee own case has accepted LIBOR plus 1% as arm s length rate of interest. Thus keeping in view the above decisions of the Tribunal in the case of the Assessee, which continue to hold the field, we do not find any merit in the contention advanced by the Assessee that no transfer pricing adjustment was warranted. The decision of CIT(A) to hold LIBOR + 1% as arm s length rate of interest in respect of loan for AEs is in line with the above decisions of the Tribunal in the case of the Assessee. Disallowance of claim of proportionate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise in the business of the Assessee. We note that the appeal preferred by the Assessee against the above order of the Tribunal on the issue of deletion of disallowance under Section 36(1)(iii) of the Act has been dismissed by the Hon ble Bombay High Court [ 2019 (10) TMI 760 - BOMBAY HIGH COURT] . Further, the Special Leave Petition [ 2020 (10) TMI 1213 - SC ORDER] preferred by the Revenue against the aforesaid order of the Hon ble Bombay High Court has also been dismissed on the ground of delay. Thus no infirmity in the order passed by the CIT(A) in allowing the claim for deduction. Disallowance of Employee Stock Option Scheme (ESOP) expenses - Allowable revenue expenses u/s 37(1) or not? - HELD THAT:- In view of the Special Bench of the Tribunal in Biocon Ltd. [ 2013 (8) TMI 629 - ITAT BANGALORE] allowed deduction of ESOP expenses under Section 37(1) of the Act stands confirmed by the Hon ble High Court [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT] we do not find any infirmity in the order passed by the CIT(A) allowing the claim for deduction of ESOP Expenses under Section 37(1). Mark to Market loss - loss pertaining to forward contracts treated as notional loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 158 - BOMBAY HIGH COURT] wherein after considering the judgment of Goetze India Ltd. Vs. CIT [ 2006 (3) TMI 75 - SUPREME COURT] it was, inter alia, held that the first appellate authorities was entitled to entertain and adjudicate even a new claim raised by the Assessee for the first time before the first appellate authority. Accordingly, we do not find any infirmity in the order passed by the CIT(A). - Shri S. Rifaur Rahman, Accountant Member And Shri Rahul Chaudhary, Judicial Member For the Appellant/Assessee : Shri Yogesh Thar, Ms. Ayushi Modani For the Respondent/Department : Shri Ajit Pal Singh Daia ORDER PER BENCH 1. This is a batch of 5 appeals pertaining to Assessment Years 2011-12, 2012-13 and 2013-14 which were heard together as the same involved identical issues and are, therefore, being disposed off by way of a common order. Assessment Year 2011-12 2. We would first take up cross-appeals for the Assessment Year 2011-12. 2.1. These cross-appeals arise from the common order, dated 31/03/2017, passed by the CIT(A) whereby the CIT(A) had partly allowed the appeal preferred by the Assessee against the Assessment Order, dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on the loans advanced to its AE's at the rate that was higher than the London Inter-Bank Borrowing Rate ( LIBOR ) and other international benchmarking rates which is used as the international standard for lending and borrowing of funds and considering the direct commercial interest of the Company no addition was justifiable on loan given to its AE 3. The Appellant prays that the AO/TPO be directed to delete the addition on account of notional interest on loans advanced to the AES or be directed to reduce the notional interest addition appropriately GROUND NO. IV: DISALLOWANCE OF Rs. 4.65,200 U/S 35D OF THE ACT IN RESPECT OF STAMPING CHARGES PAID ON FURTHER ISSUE OF SHARES: 1. On the facts and the circumstances of the case and in law, the Ld CIT (A) erred in upholding the disallowance of the claim u's 35D amounting to Rs. 4,65,200/- on the alleged ground that the expenditure is incurred for increase in authorized capital and therefore the entire expenditure is capital in nature 2 The Appellant prays that the AO be directed to delete the aforesaid addition amounting to Rs 4,65,200/-. GROUND NO. V: DISALLOWANCE OF PREMIUM PAID ARISING ON ACCOUNT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the issue has reached its finality in the assesses case. 3(ii) On the facts and in law, the Ld.CIT(A) erred in not appreciating the fact that the capital ESOP expenses are notional in nature as per SEBI guidelines and are not allowed u/s. 37(1) of the I.T.Act. 3(iii) On the facts and in law, the Ld.CIT(A) erred in not appreciating the fact that the facts of the instant case and Biocon Ltd. are different and the decision of the Special Bench of Bangalore in the case of Biocon Ltd. is not applicable in the instant case. 4) The appellant prays that the order of the CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer be restored. 5) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. The relevant facts in brief are that the Assessee is a company engaged in the business of Information Technology enabled Services and provides call centre and BPO Services. For the Assessment Year 2011-12, the Assessee filed return of income on 28/11/2011 declaring Nil income and claiming carry forward of current year losses of INR 27,00,41,977/-. 3.1. The case of the Assessee was selected for regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epayment of Optionally Convertible Debentures 14,37,11,341/- 6. Rejection of additional claim raised during assessment proceedings by way of letter dated 27/02/2015 Deduction for Employees Stock Option Plan (ESOP) Expenses 4,50,38,317/- 3.3. Against the above Assessment Order, dated 07/05/2015, the Assessee preferred appeal before CIT(A). The CIT(A), vide order dated 31/03/2017, partly allowed the appeal of the Assessee. The CIT(A) accepted the additional claim raised by the Assessee during the assessment proceedings pertaining to deduction for ESOP Expenses of INR 4,50,38,317/- and directed the Assessing Officer to allow deduction for the same under Section 37(1) of the Act. The CIT(A) also accepted Assessee s claim for deduction of INR 31,40,45,133/- under Section 36(1)(iii) of the Act and deleted the disallowance of interest and other expenses related to acquisition of share of foreign subsidiary made by the Assessing Officer. As regards transfer pricing adjustment on account of interest on loans to AEs, the CIT(A) directed the Assessing Officer to re-compute the transfer pricing adjustment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. I II have been decided against the Assessee by the Tribunal in the case of the Assessee for the Assessment Years 2008-09 and 2009-10. 4.3. On perusal of record, we find that during the previous year 2006-07, the Assessee had acquired Minacs Worldwide Inc. [hereinafter referred as Minacs Canada ], a Canadian entity engaged in BPO operations. According to the Assessee the acquisition was expected to provide significant scale and operational capabilities to the Assessee. 4.4. To execute acquisition of Minacs Worldwide INC by the Assessee through its subsidiary in Canada i.e. AV Transworks Limited (for short AVTL, Canada), the Assessee provided a corporate guarantee to a third party i.e., DBS Bank Singapore, from whom the AVTL, Canada had availed a loan of amounting USD. 24.5 million details of which are as under: Lender : DBS Bank, Singapore Borrower : AVTL, Canada (with Assessee as Guarantor) Period : 5 years (with 03/11/2006 as start date for Guarantee by the Assessee) 4.5. During the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the facts and circumstances of the case. The Ld. Departmental Representative for the Revenue has primarily reiterated the stand of the Assessing Officer and CIT (A). On the other hand, the Ld. AR for the assessee company stated that the same identical issue is covered by the Hon'ble Mumbai Tribunal's order in ITA No.7033/Mum/2012, in assessee's own case for A.Y. 2007-08 dated 25/03/2015. The Hon'ble Mumbai Tribunal in para 2.6 of the said order held that guarantee commission at the rate of 0.5% from its Associate Enterprise can be said to be at arms length. Thus, respectfully following the decision of Tribunal in assessee company's own case, whereby issue were decided in favour of the assessee company. Accordingly, we direct the AO/TPO to compute and charge the guarantee commission at the rate of 0.5% from its Associate Enterprise. 17. In the result, the ground No. 1 of Assessee's appeal in ITA No. 620/M/13 for A.Y. 2008-09, and grounds Nos: 1, 2 and 3 of Assessee's Appeal No. 4276/M/2015 for A.Y. 2009-10 are allowed and ground No. 1 of Revenue's Appeal No. 4790/M/2015 for A.Y. 2009-10 is dismissed. 4.9. Thus, for the Assessment Year 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tya Birla Minacs Philippines based on the SBI PLR rates and (c) at the rate of 8.55% for JPY loan given by the Assessee to AVTL, Canada taking the highest cost of ECB borrowings incurred by the Assessee as the basis. Thus, TPO/Assessing Officer made transfer pricing addition of INR 10,51,98,575/- in respect of interest on loans given by the Assessee to its AEs. 5.4. In appeal, the CIT(A) granted relief to the Assessee by determining arm s length rate of interest at LIBOR+1% for determining interest on loan given by the Assessee to its AE by placing reliance on the decisions of the Tribunal in the case of the Assessee for the Assessment Years 2007-08, 2008-09 and 2009-10. 5.5. Not being satisfied with the relief granted by the CIT(A), the Assessee is in appeal before the Tribunal seeking deletion of the transfer pricing adjustment to the extent sustained by the CIT(A). 5.6. The contention of the Assessee is that no transfer pricing addition was warranted in the facts and circumstances of the present case. However, we are not inclined to accept the same. While deciding this issue, the CIT(A) has concluded as under: I have gone through the submissions of the Appellant an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in detail has observed and held as under: 39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates, payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bentures mandatorily convertible into shares after 60 months from the date of issue. The number of shares to be issued on conversion was dependent upon conversion factor which was to be determined mutually by the subscriber and the Assessee. Since, the debentures were freely transferable, the Aditya Birla Nuvo Ltd. (ABNL), the parent company of the Assessee, ultimately acquired the CCDs on 07/02/2014 from the then holders of CCDs namely L T Fincorp Ltd., L T Infrastructure Finance Co. Ltd. Tata Capital Financial Services Ltd. 7.2. The contention of the Assessee is that on 28/02/2014, the terms of issue of Debentures were changed and the Debentures were converted from mandatorily convertible debentures to Optionally Convertible Debentures. The holder (i.e. ABNL) did not opt for conversion of debentures and therefore, the same were redeemed on 26/03/2014 for INR 380 Crore (including premium of 130 Crore). 7.3. Out of the total amount of premium of INR 130 Crore, in Assessment Year 2014-15 the Assessee claimed deduction for INR 54,59,43,438/- being premium pertaining to debentures proceeds utilised in business for the entire period of Assessment Year 2010-11 to Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. (Emphasis Supplied) The use of the words in any manner in the definition of Interest under the Act, supports the case of the Assessee. Therefore, whether it is a case of discount or premium, it would still be allowable as interest expense so long as it is to compensate for use of money. (d) Discount or Premium on debentures has been held as an allowance expense by the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (225 ITR 802). This was a case of 'Discount on issue of Debentures. Further, reliance was placed on the decision of Hon'ble Madras High Court in the case of CIT Vs. First Leasing Company of India Ltd (Tax Case Appeal No.209 of 2006 1099 of 2004 wherein it is held that there is no distinction between 'Premium' and 'Discount' and both of them are entitled to be spread over the period of debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Act. Entries in books of accounts are not determinative of its tax treatment [Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (82 ITR 363)]. Under similar facts, the Mumbai Bench of the Tribunal has, in the case of DCIT v. M/s Bombay Dyeing Mfg. Co. Limited (ITA No.5059/Mum/2003), held premium paid on redemption of debentures to be allowable under Section 36(1)(iii)/37 of the Act even though the same was debited to share premium reserve in the books of accounts. (g) Though the order for Assessment Year 2014-15 is under appeal before CIT(A), in order to protect the Appellant from double jeopardy, the Assessee has made an additional claim for pro-rata amount pertaining to the captioned year of INR 14,37,11,341/- vide letter, dated 27/02/2015. 7.9. Per contra, the Learned Departmental Representative placed reliance on the order passed by the CIT(A) and submitted that the expenditure was of capital nature. The CIT(A) had rightly observed that the claim has been made after the expiry of almost 4 years from the end of the relevant assessment year. The amount claimed as deduction by the Assessee did not enter the books of account of the Assessee for the relevant pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have any obligation to redeem the CCDs as at the end of the relevant previous year, or at the date of finalization of account, or even at the date of filing return of income. Therefore, in our view, the Assessee had no liability, whether ascertained or contingent, to redeem the debentures. It is admitted position that no payment towards redemption or premium was made during the relevant previous year. Therefore, in our view, the Assessee could not be permitted to claim deduction either on accrual or paid basis during the relevant previous year. 7.13. On 28/02/2014, by way of mutual agreement between ABNL and the Assessee, OCDs came into existence for the first time. The issue redemption premium arose only when ABNL opted not to get shares and instead sought redemption of debentures, and thereafter, the OCDs were redeemed by the Assessee at a premium of INR 130 Crores on 26/03/2014. Since the OCDs were not in existence during the relevant previous year, the question of allowing deduction for the proportionate amount of redemption premium as interest during the relevant previous year, in our view, does not arise. 7.14. It has been contended on behalf of the Appellant that pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year the CCDs were not held by ABNL. Therefore, the modification of terms as agreed upon between the ABNL and the Assessee, cannot change the terms and conditions which were binding upon the Assessee and the holders of CCDs at the relevant time according to which the debentures were to be compulsorily convertible into equity. Given the facts and circumstances of the present case, we are of the view that the commercial arrangement entered into by the Assessee subsequent to the filing of return of income for the relevant previous year, cannot be applied retroactively to make additional claim leading to reduction of the income returned by the Assessee. 7.16. Having perused the judicial precedents cited on behalf of the Assessee, we conclude that, in view of the above, none of the judicial precedents cited apply to the factual matrix before us and therefore, the same do not advance the case of the Assessee. 7.17. In view of the paragraph 7.10 to 7.16 above, we confirm the order passed by the CIT(A) rejecting the claim for deduction of INR 14,37,11,341/- in respect of proportionate premium on redemption of OCDs made by the Assessee during the assessment proceedings. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle or directly cannot be considered to be ordinary event of the business and therefore, cannot be termed as expenditure incurred for the purpose of assessee's business, which is providing IteS services?' 5. Regarding Question Nos.1 and 2. (a) Mr. Kotangale learned counsel appearing in support of the appeals very fairly states that both these questions stand concluded against Revenue and in favour of Respondent- assessee in the Respondent's own case by the order of this Court dated 4 September 2019 in ITXA No.303 of 2006 (Principal Commissioner of Income Tax-10 Mumbai v. Concentrix Services India Pvt. Ltd. [formerly known as Minacs Pvt. Ltd.]). Both these questions on identical facts have been decided in favour of the Respondent-assessee. (b) It is not the case of the Revenue, that there is any distinction in facts and/or law in the subject Assessment years, which would make order dated 4 September 2019 in ITXA No.303 of 2006 (2016) inapplicable to this case. (c) In the above view, these two questions do not give rise to any substantial question of law. Thus not entertained. 9.2. On perusal of above, we find that the Hon ble Bombay High Court ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract of the aforesaid decision of the Tribunal dealing with the issue under consideration read as under: 25. Ground No.5 of Assessee's appeal in ITA No. 620/M/13 for A.Y. 2008-09 and grounds Nos. 4(a) 4(b) of Revenue's Appeal No.4790/M/2015 for A.Y 2009-10 : Issue involved is: Addition in respect of interest and finance expenses related to acquisition of shares of foreign subsidiary and disallowance of the same under section 36 (1) (iii) of the I.T. Act. 26. For A.Y. 2008-09 the Assessing Officer did the addition in respect of interest and finance expenses related to acquisition of shares of foreign subsidiary. Against the said addition, the assessee filed an appeal before CIT (A)-15, Mumbai, who has confirmed the action of the Assessing Officer, therefore not being satisfied from the order of the CIT(A), the assessee is in further appeal before us on this issue. 27. For A.Y. 2009-10 the Assessing Officer did the addition in respect of interest and finance expenses related to acquisition of shares of foreign subsidiary. Against the said addition, the assessee filed an appeal before CIT (A)-55, Mumbai, who has deleted the addition made by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest bearing funds have been utilized for making investment in SPV, AVTL Canada which has acquired Minacs Canada, on account of which there has been significant rise in the business of the assessee. Further, the same has enabled the assessee to enhance its presence in the world market for its BPO business. Accordingly, the interest expenditure incurred by the assessee is out of commercial exigency of the business and hence should be allowed as business expenditure under section 36 (1) (iii)/37 (1) of the Act. Further, in A.Y. 2007-08 the assessee had net gain of Rs. 5.29 Crores arising from same borrowing of USD 75.4 million, the Assessing Officer taxed the same income arising from the same borrowing when it is positive and offered by the assessee to tax subsequently. If there is expenditure on similar transaction of borrowing the Assessing Officer can not use different yardstick and deny the claim of the expenditure in view of principles of consistency. Further, after considering all the contentions of the Assessee Company, the Ld. CIT (A) in subsequent year i.e. A.Y. 2009-10 has accepted the claim of the assessee and allowed the interest expenditure incurred by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue against the aforesaid order of the Hon ble Bombay High Court has also been dismissed on the ground of delay. 10.7. In view of the above, we do not find any infirmity in the order passed by the CIT(A) in allowing the claim for deduction of INR 31,40,45,133/- under Section 36(1)(iii) of the Act by following the binding decision of the Tribunal in the case of the Assessee which has since been confirmed by the Hon ble Bombay High Court. Accordingly, Ground No. 2 raised by the Revenue is dismissed. Ground No. 3(i), (ii) (iii) 11. Ground No. 3(i), (ii) (iii) raised by the Revenue is directed against the disallowance of Employee Stock Option Scheme (ESOP) expenses. 11.1. During the assessment proceedings, vide letter dated 27/02/2015, the Assessee made a claim for deduction of the aforesaid ESOP Expenses on the basis of the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. Vs. Deputy Commissioner of Income Tax (LTU), Bangalore : [2013] 35 taxmann.com 335 (Bangalore Special Bench). However, the Assessing Officer rejected the claim holding as under: 9.2 The submissions made by the assessee are carefully considered. However, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses by the CIT(A), the revenue is now in appeal before us. 11.4. We have heard the rival contention and perused the material on record including the judicial precedents cited during the course of hearing. 11.5. During the course of hearing, the Ld. Authorised Representative for the Appellant had relied upon the judgment of the Hon ble Karnataka High Court in the case of Commissioner of Income Tax LTU Vs. Biocon Ltd. : [2020] 121 taxmann.com 351 (Karnataka), whereby the decision of the Special Bench of the Tribunal which was followed by the CIT(A) while allowing the deduction for ESOP Expenses has been confirmed. The relevant extract of the aforesaid judgment of the Hon ble Karnataka High Court read as under: 4. On the other hand, learned counsel for the assessee submitted that discount on the issue of ESOPs is not a contingent liability but is an ascertained one. It is further submitted that ESOPs vest over a period of 4 years at the rate of 24%, which means that at the end of first year the employee has a definite right of 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. In this connection, our attention has been invited to para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Movers is no applicable to the fact situation of the case as in the aforesaid decision the Supreme Court was dealing with statutory liability pending fixation of liability, whereas, in the instant case, the assessee has a liability, therefore, the aforesaid decision of the Supreme Court does not apply. It is also pointed out that in Rotork Controls India, the Supreme Court was dealing with allowability of provision as deduction and it has been held that subject to compliance of certain conditions on matching principle, the deduction is permissible. It has further been held in the aforesaid decision that income from sale of goods is subjected to tax, therefore, the corresponding expenditure is to be allowed in the same year. The aforesaid decision is also of no assistance to the assessee as the assessee has not incurred any expenditure. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 11.6. In view of the above judgment whereby the decision of the Special Bench of the Tribunal allowed deduction of ESOP expenses under Section 37(1) of the Act stands confirmed by the Hon ble High Court, we do not find any infirmity in the order passed by the CIT(A) allowing the claim for deduction of ESOP Expenses of INR 4,50,38,317/- under Section 37(1) of the Act. Accordingly, Ground No. 3(i) (ii) (iii) raised by the Revenue are dismissed. (Assessment Year 2012-13) 12. We will now take up cross-appeals for the Assessment Year 2012-13. 12.1. These cross-appeals arise from the common order, dated 28/06/2017, passed by the CIT(A) whereby the CIT(A) had partly allowed the appeal preferred by the Assessee against the Assessment Order, dated 28/04/2016, for the Assessment Year 2012-13 passed under Section 143(3) read with Section 144C(3) of the Act. 12.2. The Assessee has raised the following grounds of appeal in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of JPY to AVTL Canada at LIBOR + 1% without appreciating the fact that it had borrowed loan from the DBS Bank Singapore a sum of loan of JPY 1983 4 Million JPY at Interest @ 0.85% and the same loan as per the standing instructions of the Appellant was transferred to its AE (AVTL Canada) by DBS Bank Singapore Appellant Company has levied a markup of 10% on the interest cost pertaining to JPY Loan for the purpose of voluntary adjustment which is at Arm's Length given the fact that the Appellant has not assumed any additional risk (iii) Not appreciating that the Appellant had a direct commercial interest in the business of its AE and such loan was given with a view to safeguard the Appellant's business interest. 2 Therefore, the Appellant prays that Arm's length adjustment made by the TPO and to the extent upheld by CIT(A) be deleted. GROUND 3: DISALLOWANCE OF PREMIUM PAID ARISING ON ACCOUNT OF REPAYMENT OF OPTIONALLY CONVERTIBLE DEBENTURES ISSUED TO ADITYA BIRLA NUVO LTD. AMOUNTING TO Rs. 12,35,78,287/-, 1 On the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in upholding the addition of Rs. 12,35,78,287/- on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled and agreed upon both by the assessee as well as the department in A.Y. 2010-11, itself that the assessee was not entitled to claim the said expenditure. 3b. On the facts, and in the circumstances of the case, the Ld CIT(A) erred in not appreciating the fact that, the assessee has adopted a colorable method to claim the ESOP expenses, by raising the claim of expenses before the AO and not through the return of income filed by it. 4. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in holding that 'Mark to Market' loss of Rs 7,15,92,175/- is not a notional loss, and therefore allowable. 5. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in allowing the delayed payments of employees' contribution to ESIC, amounting to Rs 23,30,594/-, relying upon the decision in CIT vs Hindustan Organics Chemicals Ltd. [2014] 366 ITR 1 (Bombay), without appreciating that the said decision has not been accepted by Revenue and SLP has been filed against the same The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored . 13. Both the sides agreed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) confirming the disallowance of deduction for proportionate premium of INR 12,35,78,287/- on redemption of optionally convertible debentures. 17.1. Ground No. 3 raised in appeal for the Assessment Year 2012-13 by the Assessee is identical to Ground No. V raised in appeal by the Assessee for the Assessment Year 2011-12 which has been dismissed hereinabove. Accordingly, in view of our finding/adjudication in paragraph 7 to 7.17 above, Ground No. 3 raised by the Assessee is also dismissed. Ground No. 4 18. Ground No. 4 raised by the Assessee pertains to TDS Credit claimed by the Assessee in the return of income. 18.1. On perusal of order impugned, we find that the CIT(A) had directed the Assessing Officer to allow credit for tax deducted at source as per the provisions of the Act holding as under: 13.1. I have considered the above, the contention raised by the Appellant through this ground of appeal is that of allowing credit of TDS, the AO is directed to allow credit of TDS in accordance with the provisions of the Income tax Act. 18.2. In view of the above, Ground No. 4 raised by the Assessee is disposed off with the directions to the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted by the Assessing Officer. 24.1. Ground No. 3(a) 3(b) raised by the Revenue in appeal for the Assessment Year 2012-13 by the Revenue is identical to Ground No. 3(i), 3(ii) 3(iii) raised in appeal by the Revenue for the Assessment Year 2011-12 which have been dismissed hereinabove. Accordingly, in view of our finding/adjudication in paragraph 11 to 11.6 above, Ground No. 3(a) 3(b) raised by the Revenue are dismissed. Ground No. 4 25. Ground No. 4 raised by the Revenue is pertain to Mark to Market loss of INR 7,15,92,175/- 25.1. The relevant facts in brief are that the Assessee had claimed deduction for foreign exchange loss of INR 7,15,92,175/- booked by the Assessee as Mark to Market loss pertaining to forward contracts entered into by the Assessee for hedging the foreign exchange of risk in the course of export business. The Assessing Officer disallowed the same holding the same to be notional loss by placing reliance upon the Instruction No. 3 of 2010 dated 23/03/2010 issued by Central Board of Direct Taxes (CBDT). 25.2. In appeal preferred by the Assessee, the CIT(A) overturned the decision of the Assessing Officer and allowed the deduction for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or foreign exchange loss of INR 7,15,92,175/- booked by the Assessee as Mark to Market loss. However, the Assessing Officer disallowed deduction for the same concluding as under: 8.6 In the case of Badridas Gauridu Pvt. Ltd. 261 ITR 256, the Hon'ble Bombay High Court had decided this issue in the favour of the assessee, however, the said judgement of the Hon'ble Bombay High Court was delivered on 22.01.2003. It was in the year 2010, the CBDT came with Instruction No.3 of 2010 dated 23.03.2010. In the said circular, CBDT has held as under: Marked to Market Losses' 2. Marked to Market is in substance a methodology of assigning value to a position held in a financial instrument based on its market price on the closing day of the accounting or reporting record. Essentially, 'Marked to Market' is a concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. This is required from the point of view of transparent accounting practices for the benefit of the shareholders of the company and its other stakeholders. Where companies make such an adjustment through their Trading or Profit/Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has held as under: 21. According to the Revenue the 'marked to market loss' is only notional or contingent loss until the contract is settled and as per the ground of appeal raised by the Revenue, such derivative loss is not be allowed as it is against the CBDT Instruction No.3 of 2010. 22. The brief facts of the case relating to this issue are that the assessee had debited a derivative loss of Rs. 50.35 lakhs under the head 'Finance Charges' to its profit and loss account. The assessee's explanation with regard to its above claim was called for. The assessee, vide its reply dated 12/9/2011, explained that the assessee had entered into Forward Currency exchange derivative Contracts to hedge the risk against foreign currency exchange fluctuations. Although the forward derivative contracts have not matured during the year 2008-09, the assessee company has recognized the 'mark to market loss' of Rs. 50.35 lakhs on account of currency fluctuation as on 31.3.2009 and the same has been debited to the profit and loss account. The AO, thereafter considered the CBDT Instruction No.3 of 2010, wherein a clarification was issued regarding allowing or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss oil, contract has not matured, the loss on 'marked to market' basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income and should, therefore, be added back for the purpose of computing the taxable income of an assessee. No doubt, this instruction is clearly on the point and is binding on the assessing authority. However as rightly pointed out by the CIT(A) and as held by the Hon'ble Supreme Court in the case of Hero Cycle Pvt. Ltd., (cited Supra), such instructions are not binding on the assessees nor on the appellate authority, who are entitled to examine the issue on merits and arrive at their own conclusions. The Hon'ble Supreme Court in the case of Woodward Governor of India Pvt. Ltd., reported in 312 ITR 254, has held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure u/s 37(1) of the I.T. Act, 1961. 27. The decision of the Supreme Court has been followed by the Special Bench of ITAT in the case of Bank of Bahrain and Kuwait (cited Supra), a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts in allowing notional loss on account of foreign exchange fluctuation loss amounting to Rs. 1,26,42,63,740/- claimed on account of Mark to Market basis. 17. Learned Representatives fairly agree that this issue is squarely covered by a decision of the co-ordinate bench in assessee s own case for the assessment year 2008-09, and that the learned CIT(A) has also simply followed his order for the assessment year 2008-09 which stands reversed by the co-ordinate bench. While doing so, the co-ordinate bench has observed as follows: 3. Briefly stated, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed foreign exchange loss of Rs 22,15,55,371. It was explained by the assessee that the assessee, with an export sale of Rs 2,796 crores in the said year and raw material imports of Rs 2,516.08 crores, was exposed to considerable foreign exchange fluctuation risk, and that the assessee, with a view to manage and control such risks, takes various steps such as use of derivatives, entering into foreign exchange contracts with bankers etc. It was also explained that in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Condition No.1 Whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; The Appellant is following mercantile system of accounting and that is in fact not denied by the Id. AO as per facts contained in assessment order. Condition No.2 Whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bonafide; As per facts on record, the appellant is following mercantile system of accounting from the beginning and there is no change in it. Condition No.3 Whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; Yes. In fact in the year under consideration itself, the Appellant has earned foreign exchange income of Rs. 27,95,89,730/- and incurred loss of Rs. 50,11,45,101/-, and accordingly, the same treatment has been given both to the income as well as the expenditure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Appellant, in the same assessment year under appeal before Your Honour, the Appellant has earned foreign exchange gain which has been offered for taxation, which itself shows that the system adopted by the Appellant is consistent, fair and reasonable. In view of the above facts and the fact the issue is covered by the decision of Supreme Court in the case of Woodward Governor India (P) Ltd. reported in 312 ITR 254, the ground of appeal is allowed. 4. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 6. It is one of the most fundamental principles of accounting that while all anticipated losses are taken into account in computing the profits and losses of business, even though such losses may not have crystallized, as long as these losses can be reasonably quantified. This approach can be contrasted with the anticipated profits being ignored, in the computation of profits and losses of an enterprise, unless the profits are actually realized. To that exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis- -vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of expenditure is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression expenditure incurred while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word expenditure is not defined in the 1961 Act. The word expenditure is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not being expenditure of the nature described in ss. 30 to 36 lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, we are concerned with s. 28. Therefore, s. 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (See judgment of this Court in the case of United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the Accounting Standard followed by the assessee(s) in this batch of civil appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under s. 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P L account for the reporting period. 8. In the present case also, the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the Assessing Officer has not even raised any issues with respect to the above. His case is confined to the loss being notional in nature and contrary to the CBDT guidelines. As for the CBDT instructions, it is only elementary that any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e added but for the purpose of computing taxable income. The aforesaid submission was the basis of the order of the Assessing Officer and not accepted by this Court in M/s. D. Chetan Co., (supra). Therefore, the above Circular/ Instruction would not have any application in the face of the decision of this Court in M/s. D.Chetan Co., (supra). 5. In the above view, the question as proposed, does not give rise to any substantial question of law. Thus, not entertained. 6. Accordingly, Appeal dismissed. No order as to costs. 25.9. In view of the above judicial precedents, we do not find any infirmity in the order passed by the CIT(A) allowing deduction of mark to market losses of INR 7,15,92,175/-. Ground No. 4 raised by the Revenue is, therefore, dismissed. Ground No. 5 26. Ground No. 5 raised by the Revenue is directed against the order of CIT(A) allowing deduction for delayed payments of employees contribution to ESIC made after the expiry of the time specified in the applicable statute but before the filing of tax return under Section 139(1) of the Act. 26.1. This issue is no longer res integra and stands decided against the Assessee and in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee was not entitled to claim the said expenditure. 4. On the facts, and in the circumstances of the case, whether the Ld. CIT (A) has erred in not appreciating the fact that, the assessee has adopted a colorable method to claim the ESOP expenses, by raising the claim of expenses before the AO and not through the return of income filed by it? 5 On the facts and circumstances of the case and in law whether the Ld. CIT(A) has erred in allowing the claim of deduction of the appellant u/s. 37 of the Act to the tune of Rs. 12,32,40,642/- without appreciating the same issue was decided in the favour of Revenue for AY 2012-13 in appellant's own case? 6 On the facts and circumstances of the case and in law whether the Ld. CIT(A) has erred by ignoring the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. Vs. CIT(2006) 284 ITR 323 (SC) wherein the Apex Court has held that the new claim cannot be accepted in the course of assessment proceedings? 28. For the Assessment Year 2013-14 also, both the sides agreed that the grounds raised by the Revenue in the above appeal for the Assessment Year 2013-14 as well as the applicable facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvation. 31.2. The Revenue is now in appeal before us. 31.3. We have heard the rival contention and perused the material on record. In appeal for the Assessment Year 2012-13, we have confirmed the order of the CIT(A) allowing deduction for Mark to Market Loss claimed by the Assessee, therefore, the reversal of such Mark to Market Losses or part thereof during the Assessment Year 2013-14, is to be treated as income of the Assessee and therefore, the same is not required to be excluded. Accordingly, the order passed by the CIT(A) is overturned and the Assessing Officer is directed not to exclude right back up Mark to Market Losses of INR 4,06,80,762/- made by the Assessee during the Assessment Year 2013-14. Accordingly, Ground No. 2 raised by the Revenue is allowed. Ground No. 3 4 32. Ground No. 3 4 raised by the Revenue are directed against the order of CIT(A) accepting the claim of the Assessee pertaining deduction of Employee Stock Option Scheme (ESOP) expenses of INR 2,38,24,000/- which was rejected by the Assessing Officer. 32.1. Ground No. 3 4 raised by the Revenue in appeal for the Assessment Year 2013-14 by the Revenue are identical to Ground No. 3( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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