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TMI Blog2024 (11) TMI 1419X X X X Extracts X X X X X X X X Extracts X X X X ..... No.33/Chny/2021: (AY 2015-16): 3. Ground Nos.2 to 2.1(a), 2.3 and 2.4 relates to the issue of TP adjustment towards international transactions amounting to Rs.6,54,47,655/-. The relevant observations of the TPO is found at page 11 under para 7 of the TPO order, wherein he observes as under:- "The crux of the issue is the interest on the loans given is waived by the assessee though the loans charged with 3M EURIBOR + 3.5% p.a (3.66%) interest. It means the assessee has not been compensated by the AEs for the loans given to them. Since the interest on loan is not received by the assessee at the rate of 3M EURIBOR + 3.5% p.a the transaction cannot be considered at arm's length. The assessee has charged interest @9% for the loan given to one of the related company i.e. Windbolt GmbH, Germany, which is a joint venture. The assessee also given toits own subsidiaries which are also in Germany without any interest (waived). So the interest rate @9% can be considered as internal CUP. further, The assessee has not replied to the specific query that why interest charged to the joint venture company located in Germany should not be treated as a internal CUP for the loans given to its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im, for the year under consideration also the issue of disallowance of interest may be remitted back to the file of the AO with similar directions. 3.2 Per contra, the Ld.DR submitted that interest should be charged on the amount advanced by the assessee to its AE's at Germany; and since, the assessee has charged @9% from a joint venture, the AO rightly charged interest @9% rate of interest on the loan advanced to other three AEs. Therefore, he does not want us to interfere with the order of the DRP/TPO/AO. In his rejoinder, the Ld.AR pointed out that the company from whom assessee charged interest @9% was a joint-venture and formed for execution of a new project and therefore, there was more risk involved in the said project and therefore, interest was charged at the rate of 9%. Therefore, according to the Ld.AR, the same treatment cannot be given to transactions with that of wholly owned subsidiaries. 3.3 We have heard both the parties and perused the material available on record. We note that the assessee company had waived interest on loans to its wholly owned two subsidiary companies at Germany and didn't charge any interest from Sundaram International Inc USA. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and directed that AO to restrict the disallowance at 0.5% of the guarantee value. 4.2 After hearing both the parties and going through the facts and circumstances of the case, we concur with the TPO's order that this is an international transaction, but upward adjustment is now covered in favour of the assessee by the decision of Hon'ble jurisdictional High Court in the case of Redington (India) Ltd. (supra) and the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd, supra, therefore, we direct the AO to restrict adjustment @0.5% of the guarantee value. 5. Ground Nos.3 to 3.3 relates to issue of disallowance of software expenses as revenue expenditure amounting to Rs.1,20,55,431/-. 5.1 At the outset, the Ld.AR of the assessee brought to our notice that similar issue had come up before this Tribunal in the assessee's own case for AY 2011-12 and the Tribunal was pleased to set aside the matter back to the file of the AO by observing as under: "13. We have considered the rival submissions on either side and perused the relevant material available on record. As rightly submitted by the Ld. D.R., the assessee's claim of expenditure included fee for software l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue expenditure. However, if the application software is for a longer period, then it will have enduring benefit, therefore, it has to be capitalized. Since the facts need to be verified. This Tribunal is of the considered opinion that the matter can be verified by the Assessing Officer. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to verify the nature of expenditure and thereafter decide the issue in accordance with law after giving a reasonable opportunity to the assessee. 5.3 In the light of the above orders of the Tribunal in the assessee's own case as well as in AY 2013-14, we note that the assessee's case as far as total software expenditure in this year is concerned is noted to be on account of annual- licence fee, which issue was set aside back to the file of the AO to verify the nature of expenditure as observed (supra); therefore, respectfully following the same, we set-aside the impugned order on this issue back to the file of the AO to verify the nature of expenditure as observed (supra) and decide the issue as directed in assessee's own case supra in accordance to law after giving reasonable opportunity to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of claim of foreign exchange fluctuation loss amounting to Rs.73,38,050/-. The assessee claimed foreign exchange fluctuation loss of Rs.86.33 lakhs; and the AO asked the assessee to explain the claim; and the assessee submitted that the transaction in question pertains to foreign currency loan taken towards acquisition of fixed assets. According to assessee, since loan was taken for acquisition of fixed assets which were "indigenous assets" the foreign exchange fluctuation on the same is allowable. However, the AO didn't agree and cited the decision of the Hon'ble Supreme Court in the case of ACIT v. M/s.Elecon Engineering Co. Ltd., reported in [2010] 322 ITR 20 (SC), and was of the opinion that assessee is only eligible for depreciation on such assets @15% being Plant & Building and allowed a sum of Rs.12,94,950/- and the balance amount of Rs.73,38,050/- was added back to the total income of the assessee. The DRP confirmed the same. The Ld.AR of the assessee submitted that the AO failed to appreciate that section 43A applies only towards foreign exchange loss on acquisition of imported assets (Rs 423.63 Lakhs have already been suomoto disallowed by assessee in Return of income) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is thus allowable u/S 37 as a deduction under IT Act. * This was upheld in Wipro Finance SC which was referred to in Alchymars(para of 7 of the Order in running page 44 of paperbook-2) the ITAT held as follows: "We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purpose of fixed assets all of which were purchased from the domestic market i.e., domestic assets. The assessee did not use the loan for purchase of assets from abroad. Accordingly, fluctuation in the exchange rate viz-a-viz the rate at which loans were available, the transactional gain or loss is to be assessed as Revenue. Respectfully following the decision of Hon'ble Supreme Court in the case of Wipro Finance Ltd., supra, we allow the claim of assessee." * The Pune ITAT in Cooper Corporation (P) Ltd Vs DCIT in ITA No 866/PN/2014 has held in para 11 as follows:- "For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs were for the purpose of business and hence cost relating thereof is an allowable deduction. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that only in respect of transactions to which Section 43A applies, foreign exchange loss or gains should be adjusted against the cost of the assets. In respect of other transactions, the forex loss should be allowed as a revenue expenditure. 4. Brief facts are that the assessee is engaged in the business of manufacture and sale of API and bulk drug intermediates. The AO during the course of assessment proceedings noticed that the assessee had claimed loss of Rs.37,08,705/- arising out of foreign exchange fluctuation in respect of foreign loss obtained by assessee. The AO disallowed the loss claimed on the ground that the amounts were utilized for acquisition of assets and hence, capital in nature. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after considering the submissions of the assessee noted that gain on fluctuations on account of foreign currency loan taken to acquire fixed capital asset will be treated as capital receipt. Hence, loss on fluctuation on account of foreign currency loans tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order accordingly. The ld.counsel for the assessee also relied on the decision of Coordinate Bench of Pune, in the case of Cooper Corporation (P) Ltd., vs. DCIT, in ITA No.866/PN/2014 and Chennai Bench in the case of TVS Motor Co. Ltd., in ITA No.1153/Mds/2016 & 1183/Mds./2016. 6. When these were pointed out to ld. Senior DR, he only relied on the assessment order and that of the CIT(A). 7. We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purpose of fixed assets all of which were purchased from domestic market i.e., domestic assets. The assessee did not use the loan for purchase of assets from abroad. Accordingly, fluctuation in the exchange rate viza-viz the rate at which loans was available, the transactional gain or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of CIT v. Woodward Governor 312 ITR 254, wherein, it was held as under: "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 Section 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 are now required to examine the said Accounting Standard ("AS"). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under Section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign curren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." (emphasis supplied) 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) 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; (ii) 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 bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to its subsidiary i.e., SFIL which is an investment arm of the assessee. M/s SFIL, as on investment company, promoted new ventures and made investments on behalf of the assessee, granted loans and acquired shares of other companies. M/s SFIL was a registered NBFC and its objects were money lending. During the year, fresh loans have been advanced to M/s Upasana Engineering Ltd. which is in the same line of business as that of assessee. A part of the loans and equity investments have been made in M/s TVS Infotech Ltd. which facilitated IT operations for the assessee. The earlier loans as granted to M/s SFZL were utilized to expand overseas market. It is also an undisputed fact that all these entities generated dividend and the assessee was benefitted by way of dividend, capital appreciation and ease of operations. Thus the test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon'ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) would favor the case of the assessee. In this decision, it was held that once nexus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for AYs 2003-04 & 2005-06, ITA Nos.956/Mds/2011 & ors. order dated 15.07.2016. Nothing has been shown to us that the aforesaid order has been reversed by any judicial authority, in any manner or the ratio of the same is not applicable to the facts of this year. 13. In view of the foregoing, the impugned order would not require any interference on our part. By confirming the stand of Ld. CIT(A), we dismiss the appeal. Appeal for AY 2007-08 14. It is undisputed position that similar are the facts in AY 2007-08. The Ld. AO has repeated interest disallowance of Rs.230.92 Lacs on similar reasoning. However, the Ld. CIT(A), on similar findings, has deleted the additions. Aggrieved, the revenue is in further appeal before us. 15. Since facts as well as issue is similar in this year, our findings as well as adjudication as for AY 2006-07 shall mutatis mutandis apply to this year also. Resultantly, the appeal stands dismissed. 9.3 Before us, the Ld.AR brought to our notice that the assessee had profit after tax to the tune of Rs.13,532.24 Lakhs and its net worth was Rs.85,896.55 Lakhs and the loan given to the sister concern is only to the tune of Rs.11,90,30,000/-. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally for AY 2015-16 on 30.11.2015 i.e., on due date. It was brought to our notice that notice u/s.148 dated 25.09.2017 was received by the company on 27.09.2017 and hence, return was filed in response to notice on 26.10.2017 i.e., within 30 days from the date of service of notice. However, interest u/s.234A was computed in the assessment order as tabulated under:- Tax Payable as per assessment order Delay period (in months) Interest Interest u/s.234A (A) (B) (C) (A)*(B)*(C) 3,91,58,310 1 1% 3,91,583 12.1 Therefore, according to the Ld. AR interest u/s.234A cannot be levied. Aforesaid facts asserted by the assessee, if found to be correct, then no interest is leviable u/s.234A of the Act. Therefore, AO may verify the same and pass orders accordingly. 13. The assessee has raised additional ground as under:- "1.The Deputy Commissioner of Income-tax ought to allow claim of deduction u/s. 10AA of Rs. 25,76,37,119/- for SEZ Unit-I and Rs. 13,28,07,297/- for SEZ Unit-II as per the provisions of Sec.1 0AA in light of the decision of the Mumbai Tribunal in the case of Reliance Industries Limited in ITA No. 7299/ Mum /2017 applying the ratio of the decision of the Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing decisions for admission of additional grounds: a. CIT Vs M.K.Yashwant Singh (231 ITR 145 (Del)) b. National Thermal Power Co Ltd (229 ITR 383 (SC)) c. CIT (vs) Ashok Leyland Ltd (253 ITR 425 (Mad)) d. CIT Vs Associated Stone Industries (224 ITR 560 (SC)) In addition to the grounds of objections raised in Form 36B before the Hon'ble Tribunal, the Petitioner hereby wishes to file the following Additional grounds and it is prayed that additional grounds may be admitted and decided on merits. 13.2 Since we find that this issue was not raised by the assessee before the AO, hence, there was no occasion for him to look into the merits of such claim. Therefore, we admit this ground and remit it back to the file of the AO for de novo adjudication and the assessee is at liberty to file all relevant documents necessary for adjudication of this ground and the AO to pass order after hearing the assessee in accordance to law. 14. In the result, appeal filed by the assessee is partly allowed for statistical purposes. IT(TP)A No.32/Chny/2021: (AY 2016-17): 15. Since facts and issues are same for appeal for 2016-17, except difference in figures and there is no chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the expenditure was fully vouched for and was supported by documentary evidence. The DSIR has not given any reason in support of its action, it is seen that the extent of expenditure was never verified by the AO. The appellant has not noted which expenditure was not considered by the D.S.I.R. Therefore, it cannot be ascertained as to whether the expenditure are properly vouched or not, It is also not clear as to why the DSIR has not allowed the claim of expenditure of the appellant. Therefore, it is held that the decision of Hon'ble 1TAT in the case of Torrent Pharmaceutical Ltd is not directly applicable in the instant situation. Further, a plain reading of section 35(2AB}(1) would indicate that where a company is engaged in the business of biotechnology or any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on 'Scientific Research' (not being expenditure in the nature of cost of any land or building) on in-house, research and development facility 'as approved by the prescribed authority/ such assessee would be entitled to a deduction of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns undisputed that the DSIR had not given any reason in support of its action; that the extent of the expenditure was never verified by the A.O.; that the assessee also has not pointed out as to which expenditure was not considered by the DSIR; that in these facts, the ld. CIT(A) cannot be said to have faulted in holding that it cannot be ascertained as to whether the expenditure was properly vouched or not; that it is also unclear as to why the DSIR did not allow the claim of the expenditure as made by the assessee; that, therefore, as correctly held by the ld. CIT(A), Torrent Pharmaceuticals Ltd. (supra) was rightly held to be inapplicable to the facts of the present case. 6. Here it is seen that it is the assessee's stand that it had incurred inhouse Scientific Research expenditure (capital and revenue). It had claimed weighted deduction u/s. 35(2)(AB) of the Act, as under: i. Revenue expenditure of Rs.10,05,03,198/- @ 150% - Rs.15,07,54,797/-. ii. Capital expenditure of Rs.1,27,94,490/- @ 150% - Rs.1,91,91,735/-. The assessee, thus, claimed deduction of a sum of Rs.16,99,46,532/-. The details of this expenditure has been filed at Assessee's Paper Book (APB f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred. Explanation.--For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970). (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision of the Act prescribed or approved to be granted by the prescribed authority vis-à-vis the expenditure from year to year; that the amendment was brought in by the Income Tax amendment Rules w.e.f. 01.04.2016, wherein, a separate part has been inserted for certifying the amount of expenditure from year to year and the amended Form No. 3CL, thus, lays down the procedure to be followed by the prescribed authority; that prior to the said amendment, no such procedure; methodology was prescribed; and that therefore, in the absence of any such procedure or methodology, the A.O. had erred in curtailing the expenditure and consequent weighted deduction claimed u/s. 35(2AB) of the Act on the summon that the prescribed authority had approved the part of the expenditure in Form No. 3CL. 12. It would also be apt to reproduce here-under the provisions substituted in clause (b) of sub rule (7A) of Rule 6, as brought in by the amendment effective from 01.07.2016 as above: "The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of the in-house research and development facility in Part A of Room No. 3CL; (ii) quantifying the expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as the ld. CIT(A). The attention in this regard has been drawn to the grounds taken by the assessee and the submissions raised by the assessee before the ld. CIT(A). It has further been submitted that in the remand proceedings, qua this issue, no enquiry whatsoever had been made by the A.O., notwithstanding the fact that the remand proceedings were proceedings where the assessee was required to press his claim afresh, which could have only be done by way of objecting to the action of the A.O. 17. Be that as it may, the disallowance stands objected to by the assessee before us, which issue we have answered in the preceding paragraphs. In view of the above, finding merit in ground no. 1 raised by the assessee, the same is hereby accepted to the reversing order passed by the ld. CIT(A) on this issue and deleting the disallowance of Rs.42,52,032/-, made u/s. 35(2AB) of the Act. 16.3 We note that similar issue had come up before the Tribunal for AY 2013-14, wherein the Tribunal allowed weighted deduction as claimed by the assessee, even though DSIR (prescribed authority) didn't quantify the expenditure. The Tribunal for AY 2013-14, while allowing claim of the assessee observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement of law is applicable for assessee in the year under consideration i.e., AY 2016-17, since the Rule came into force from 01.07.2016 onwards. 16.5 It is trite law that the law which would apply to assessment year is the law prevailing on 1st day of April, which means in this case, the law which was in operation prior to amendment i.e., un-amended law, meaning the DSIR had to submit its report in relation to the approval of in-house facility and development facility in Form 3CL to DG (Income Tax Exemption) within sixty days of its granting approval unlike after amendment quantum of expenditure incurred for in-house research & development facility by the assessee was required to be given by the authority. For such a proposition, we rely on the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Ltd vs. CIT (Godrej & Boyce Mfg Co. Ltd v DCIT 328 ITR 81 Bombay HC) where in it was held: "67. Even in the absence of sub sections (2) and (3) of Section 14A and of Rule 8D, the Assessing Officer was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub section (1) of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "4.3 We note that the assessee has claimed deduction of Rs.14,20,60,668/- and the AO allowed deduction of only Rs.13,52,44,00/- as approved by the DSIR. It is noted that prior to the amendment brought in Rule 6(7A) of the Income Tax Rules, 1962 (hereinafter in short 'the Rules') w.e.f. 01.07.2016 i.e. from AY 2016-17, the prescribed authority had to submit its report in relation to the approval of in-house facility and development facility in Form 3CL to DG (Income Tax Exemption) within sixty days of its granting approval unlike after the amendment, the quantum of expenditure incurred for in-house research & development facility by assessee was required to be given by the authority; and since, the year under consideration (i.e. AY 2013-14) and the amendment was not applicable as noted (supra) in the case of Crompton Greaves Ltd., the assessee has rightly contended that amendment was not applicable, and the prescribed authority was not required to quantify the expenditure and had to only give report in relation to the approval of in-house facility and development facility, and therefore, in the absence of any requirement of law, the AO erred in curtailing the expenditure and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D 76,66,627 14AdisallowanceadmittedbyAssessee - Disallowance u/s. 14A 76,66,627 18.2 The DRP confirmed it. Assailing the action of the AO/DRP, the Ld.AR submitted that no disallowance under Rule 8D(ii) should be resorted to, because investments made for earning exempt income was Rs.291 Crores and assessee had own funds of more than Rs.1016 Crores as discernible from the balance sheet placed at page 15 of the paper book-I. Therefore, according to the Ld.AR no disallowance is warranted as held by the Hon'ble Bombay High Court in the case of CIT v. Reliance Utility & Power Ltd. (313 ITR 340). We find force in the submission of the Ld.AR that since assessee had own funds of more than Rs. Thousand Crores and investments as noted by the AO is only to the tune of Rs. Two Hundred & Ninety One Crores, it can be safely presumed that its own funds (interest free) were utilized for earning of exempt income. Therefore, no disallowance under Rule 8D(2)(ii) is warranted in this case. 18.3 Assailing the action of the AO in making adjustment u/r.8D(2)(iii) i.e. by applying 0.5% of the total investments made, the Ld.AR submitted that investment which earned dividend should only be c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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