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TMI Blog2025 (3) TMI 1454X X X X Extracts X X X X X X X X Extracts X X X X ..... he tune of Rs.53,88,00,000/- on behalf of the foreign subsidiary M/s PT TVS Motor Company, Indonesia ('AE'). The assessee had also given Letters of Comfort (LOC) of Rs.10,57,00,000/- to Banks/AE for the loans borrowed by the AE. The assessee didn't charge any fee towards such corporate guarantee and LOC issued in favour of the AE. The TPO is noted to have made transfer pricing adjustment in relation thereto on the same lines as confirmed by the DRP in the earlier year viz., 2% of the value of corporate guarantee and LOC. Aggrieved, the assessee preferred objection before the DRP which confirmed the action of the TPO. Now, the assessee is in appeal before us. 3.2 Heard both the parties. The Ld. AR for the assessee has contended that since the corporate guarantee and Letter of Comfort was provided without any cost to the AE, it didn't have any bearing of profits, income, losses of the assessee and therefore could not be regarded as an international transaction and be benchmarked under the transfer pricing provisions. In this regard, the Ld. AR relied upon the decision rendered by this Tribunal in their own case for AY 2011-12. We however note that the provisions of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. 76. In the light of the above decisions, we hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guarantee and restore the order passed by the DRP. 3.3 We also note that this Tribunal in the assessee's own case for the subsequent AY 2013-14 in IT (TP) A No.66/Chny/2019 & ITA No.2404/Chny/2019, had held the transaction of corporate guarantee to be an international transaction by benchmarking the same at 0.5%. Accordingly, the first plea of the assessee is hereby rejected. 3.4 Hence, the limited issue now to be adjudicated is the ALP value of the guarantee commission. In this regard, the Ld. AR had brought to our notice that this Tribunal in their own case for AY 2013-14, by relying on the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm' but the overall arrangement/ substance of the transactions that must be kept in mind. Section 92F (v) of the Income-tax Act states as below: "transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing;" Similarly, Rule 10B (2)(c) states: "the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;" It is evident from the above extracted provision that an arrangement between two AEs for allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises is an international transaction. In this case, admittedly, the assessee has incurred the cost of AMP for the benefits of its AE accordingly AMP expenditure is an International transaction under section 92B(1) of the Act. Apart from this, in the Finance Act, 2012, an explanation to Sec.92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pricing arrangements with the vendors and enter into contracts -- Discussion from time to time on the implementation strategy for brand promotion activities with the vendor, providing guidance and co-ordination -- Create marketing and promotional materials (flyers/leaflets/ brochures) through the third party vendors -- Monitor the third party vendors in the execution phase of the brand promotion activities -- Payment to third party vendors for the services received. 8.4 To arrive at the ALP of AMP expenses, it is important to understand that whether TVSM India is promoting a brand in Indonesia as a legal owner or it is assisting PT TVS Indonesia being licensed manufacturer by way of increase of sale using TVS brand in Indonesia. As per the argument of the assessee that PT TVS Indonesia had incurred higher percentage of AMP expenses it means that the economic ownership of TVS brand in Indonesia vests with AE PT TVS Indonesia. However it may be also possible that the percentage of AMP expenses incurred by PT TVS Indonesia is less than what the other independent licensed manufacturer would have incurred in Indonesia. If so it implies that, TVSM India is providing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred in favour of AE PT TVS Indonesia. 8.8 To find out the mark-up of ALP of the AMP services rendered towards brand promotion/excess AMP, an independent search was conducted and 4 companies are selected as comparable companies. The margin of 4 comparable companies is annexed as Annexure and the same is 6.12% (OP/OI). 8.9 In view of the discussion made above, the amount which represents the amount that should have been compensated to the assessee company is re- computed hereunder: Particulars Amount in Rs. Advertisement and publicity 12,95,68,031 Total AMP expenses 14,99,00,000 Sales of the assessee to AE 51,17,37,520 AMP/Sales Ratio of the assessee 25.31% The ALP of the International transaction related to the incurring of AMP expense leading to the creation a marketing intangible is calculated as under: Particulars Amount in INR Total sales to AE 51,17,37,520 Arm's length level of AMP exp. (% of sale) 0.19% Arm's length AMP 9,72,301 Amount actually spent on AMP exp. 12,95,68,031 Amount spent in excess as service provider 12,85,95,729 Mark-up @ 6.12% 78,70,058 The amount by which the assessee company should have been reimbursed by A.E, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s did not correctly appreciate the basic facts and therefore erroneously made the impugned adjustment. The Ld. AR explained to us that, in all the AMP cases, impugned by the Revenue, the position taken is that, the global foreign headquarter / AE owns the brands and the subsidiary in India was incurring marketing expenses and therefore, the Revenue took a view that the incurrence of marketing expenses by the Subsidiary created marketing tangibles which enhanced the brand values owned by the foreign company and therefore the foreign company should reimburse the Indian subsidiary for its marketing spend with a mark-up. Applying the foregoing principle, the Ld. AR submitted that, in the present case, the assessee was the owner of the brand and its subsidiary was in Indonesia and therefore, the AMP spends ought to be incurred only by the brand owner, i.e. the assessee and if the subsidiary in Indonesia incurs any AMP expenses, then the foreign AE ought to recover the same with a mark-up from the assessee. According to the Ld. AR therefore, the Revenue cannot blow hot and cold by taking completely contrary positions across different cases. The Ld. AR accordingly urged that the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Court upheld the assessee's plea that the Indian subsidiary had rightly incurred the AMP expenses in its own right for the licensed products being marketed in India and that such AMP expenses could not be said to be recouped from the foreign holding company on the pretext that since the legal ownership of brand vested with the latter, such AMP expenses benefitted the foreign holding company by enhancing its brand value. The Hon'ble High Court held that, it was necessary for the Revenue to show existence of some arrangement or understanding between the parties regarding the AMP spends and it particularly negated the application of bright line test. 4.7 Now in the present case before us, it is the assessee which is the Indian holding company having ownership of the brand, which it has licensed to the foreign AE, PT TVS Indonesia. It is not known whether the foreign AE had incurred any marketing expenses in its own right. Also, it is not discernible from the material placed on record as to whether the marketing expenses incurred by the assessee was only towards its own business in Indonesia and for enhancement of its brand value. None of the aforesaid details have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts any arrangement between the parties at all or not. For the aforesaid reasons and in fitness of the matters, we set aside the order passed by the AO on AMP expenses and restore the same to the file of AO/TPO for examining it afresh. The TPO while deciding this issue shall keep in mind the ratio laid down in the decisions of the Hon'ble Delhi High Court (supra) and/or any subsequent developments on this issue, and shall pass a speaking order after allowing assessee sufficient opportunity of being heard. 4.10 For the reason set out above therefore, this ground is accordingly allowed for statistical purposes. 5. Ground Nos.8 & 9 are in relation to the transfer pricing adjustment on account of royalty of Rs.2,15,56,000/ -. 5.1 Brief facts are that, the TPO noted that the assessee did not earn any royalty despite providing use of technical support/brand to its AE in Indonesia. At the same time, he observed that, the assessee company received Rs.69,03,943/- as royalty during AY 2010-11 @ 2% of ex-factory sale. Therefore, the TPO required the assessee to explain as why transfer pricing adjustment in relation to royalty should not be made @ 2% of ex-factory sale in the relevant A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst this, the assessee is in appeal before us. 13. We have heard both the parties and perused the material on record. In this case, assessee following the mercantile system of accounting, there is no question of deferment of receipt of income since the assessee was in a position to create the document as the transaction with AE which cannot be appreciated. It is only afterthought so as to postpone the liability of taxation. Accordingly, we are of the opinion that lower authorities were justified treating the accrued royalty as income of assessee. Thus, this ground is rejected. 5.4 Following the above decision (supra), this ground is also rejected. 6. Ground No.10 is against the disallowance of u/s.14A of the Act read with Rule 8D. 6.1 Brief facts are that, the AO noted that assessee has earned dividend income of Rs.2,42,00,000/- and held investments as on 31.03.2012 to the tune of Rs.930,92,00,000/ -. Therefore, according to him, disallowance u/s.14A r.w.r.8D was required. The AO accordingly computed disallowance of Rs.8,28,74,299/- under Rule 8D. Having regard to the fact that the assessee had suomoto disallowed sum of Rs.94,55,825/-, the AO made further disallowance of Rs.7, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the AO is directed to verify the computation provided by the assessee andre-compute the disallowance under section 14A read with Rule 8D(2)(iii) accordingly. This ground is therefore partly allowed. 7. Ground No.11 is against the disallowance of export agency commission paid to non-residents u/s.40(a)(i) of the Act, to the tune of Rs.26,58,53,696/ -. 7.1 The AO noted that, the assessee has made payments to non- resident Indians abroad to the tune of Rs.26,58,53,696/- towards export agency commission. According to the AO, the assessee has not deducted tax at source. When confronted, the assessee had submitted that, these are payments made to foreign agents for the purpose of promoting sale of products of the assessee abroad. Since none of the services were being provided by the agent in India, no income shall be deemed to accrue or arise in India and consequently the assessee was not under any obligation to deduct tax at source on such payments under Section 195 of the Act. The AO however did not agree with the submission of the assessee and disallowed the payment of Rs.26,58,53,696/- for non-deduction of TDS in terms of Section 40(a)(i) of the Act, which was also confirmed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission. 15. We have heard both the parties and perused the material on record. A similar issue came for consideration before this Tribunal in assessee's own case in ITA Nos.1707 & 1782/Mds./2012 for assessment year 2008-09 vide order dated 27.04.2016 wherein held as follows :- "27. We have considered rival submissions and perused the materials on record. With regard to the issue as to whether the TDS has to be deducted or not when the commission payment made to the overseas agents, the isuse is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Faizan Shoes Pvt Ltd. [2014} 367 ITR 155, wherein by dismissing the appeal of the Revenue, the Hon'ble High Court has held as under :-- Held, dismissing the appeal, that on a reading of section 9(1)(vii),commission paid by the assessee to the non-resident agents would not come under the term "fees for technical services". For procuring orders for leather business from overseas buyers, wholesalers or retailers, as the case may be, the non-resident agent was paid 2.5per cent. commission on free on board basis. This was a commissions impliciter. What was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to acquisition of fixed assets. This being so, the assessee cannot change their stand when it comes to claiming of expenditure for income tax purposes and say that the expenditure was incidental to the business. The treatment of an expenditure as capital or revenue depends upon the period for which the enduring benefit was derived by the assessee. The assessee itself admitted that the benefit would be enduring for many years and had capitalized the same in the books. Hence, for income tax purposes also, the same has to be treated as capital in nature. In view of the above Rs.4,09,82,305 was treated as capital in nature, disallowed and added back to the total income. However, depreciation is allowed." 8.2 The above findings of the AO was upheld by the DRP. Aggrieved, the assessee is before us. 8.3 Assailing the action of the lower authorities, the Ld.AR of the assessee submitted that the claim of the forward premium as revenue in nature was in accordance with prescribed norms, i.e (i) it was in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), (AS-11) in this regard. (ii) it was in accordance with the Income Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see amounting in all to Rs. 38,96,97,000/- . The claim is vis a vis the amortized portion of the forward cover premium, which fact is noted in para 3.1 of the assessment order. These foreign exchange forward contracts were entered for the purposes of repayment of foreign exchange loan/external commercial borrowing taken by the assessee for its projects in the renewal energy business, which fact is not disputed . Having outlined the facts as above we shall now proceed to adjudicate the issue. 13. A bare perusal of the above reveals that AS-11 prescribes how the effects of changes in foreign exchange rate is to be accounted for on transactions undertaken in foreign currency or in foreign country. One of the effects dealt with the standard relates to premium paid on foreign exchange cover. Thus with respect to the issue before us, undoubtedly it is AS-11 which prescribes the method of accounting for the same and it recommends the premium paid on foreign exchange forward contracts to be amortized as expense or income over the life of the contracts. The term expense has been used in juxtaposition with income and its meaning has to be derived in conjunction and consonance with the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .CIT(A) on the decision of the Bangalore Bench of the ITAT in the case of Orchid Ply Industries Ltd. (supra) for the proposition that the loan having been taken for meeting capital obligations,the premium paid for forward cover also is to be treated as capital in nature, we find is of no assistance to the assessee since the Visakhapatnam Bench of the ITAT in the case of Maddi Lakshmaiah & Co. Ltd. (supra) held that for determining whether devaluation loss is Revenue or capital, the object for which the currency is obtained is not relevant and what is relevant is the utilization of the amount at the time of devaluation. The ITAT while holding so referred to and relied on the decision of the Hon'ble apex court in the case of CIT v. Woodword Governor India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254/223 CTR 1 and the Hon'ble Bombay High Court in the case of CIT v. V.S. Dempo& Co. (P.) Ltd. [1994] 72 Taxman 134/206 ITR 291/[1993] 115 CTR 163. 15. In view of the above, we hold that the assessee is entitled to claim the amortization of premium paid on foreign exchange contracts amounting to Rs. 38,96,97,000/ -. " 8.6 In view of the above decision (supra), we direct the AO to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal before us. 21. Before us, Id.A.R relied on the order of Pune Tribunal, in the case of Cooper Corporation in ITA No.866/PN/2014. According to him, foreign fluctuation exchange fluctuation in revenue's field. Hence, it is allowable expenditure. 22. We have heard both the parties and perused the material on record. Admittedly, this issue came up for consideration before Pune Tribunal, in the case of Cooper Corporation in ITA No.866/PN/2014 vide order dated 29.04.2016 for assessment year 2008-09wherein held as follows :- "10. We have carefully considered the rival submissions. Order of the authorities below and case laws cited. The Central issue involved in the present case is whether provisions for loss in the hands of assessee on account of restatement of outstanding foreign currency loans necessitated by fluctuation in foreign exchange would be allowable as business loss or a loss of capital nature in the facts narrated above. While as per the revenue, the increased liability due to exchange fluctuation correspond with carrying costs of the fixed assets and thus capital in nature, the assessee seeks to submit that the loss is revenue in nature. 10.1 On consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso, in terms, mandates that accounting standards as applicable is required to be followed while drawing statement of affairs. S. 145 of the Income Tax Act, 1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. Thus, in view of the various provisions of the Companies Act and Income Tax Act, it was mandatory to draw accounts as per AS II. Thus, in our considered view, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent or a I hypothetical liability. A legal liability also exists against the assessee due to fluctuation and loss arising there from. Actual payment of loss is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent. 10.4 Copious reference has been made to S. 43A by Assessee as well as revenue. Thus, it would be pertinent to examine the issue on the touchstone of S. 43A of the Act. Section 43A, to the extent relevant in the context, reads as under: "Notwithstanding anything cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment A bare reading of the aforesaid provision of Section 43A, which opens with a non-obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that S.43A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It therefore deals with realized exchange gain/ loss. The treatment of unrealized exchange gain/loss is not covered under the scope of S. 43A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines etc. 10.5 Before We delineate on the allowability of loss based on generally accepted accountancy principles, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs." Thus, it is evident the variation in the loan amount has no bearing on the cost of the asset as the loan is a distinct and independent transaction as in comparison with acquisition of assets out of said loan amount borrowed. Actual cost of the corresponding fixed asset acquired earlier by utilizing the aforesaid loan will not undergo any change owing to such fluctuation. 10.7 The issue is also tested in the light of provision of S. 36(1)(iii) governing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income. Section 211 of the Companies Act also similarly casts a duty on a company to give a true and fair view of the profit and loss of the company for the financial year. It also requires the company to adhere, the accounting standards for preparation of profit in the Profit & Loss Account and the Balance Sheet. A conjoint reading of section 145 of the Act and section 211 of the Companies Act leaves no room for doubt that' the Assessee is obliged to follow the accounting standards prescribed to determine business income under the head "business or profession". We notice that the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed that AS-I I is mandatory in nature. In the light of observations made in Woodward Governor India (P) Ltd. (supra), we arc of the view that loss arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in the Profit & Loss account in accordance with accounting fiat of AS-11. 10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. (supra) relied upon by the Ld. Departmental Representative is of no assistance to the Revenue. The Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ground No.1 is allowed." In view of the decision of Co-ordinate Bench of Pune Tribunal, this ground raised by the assessee is allowed." 8.8 It is noted that the lower authorities had made the impugned disallowance on the limited point that, the assessee's entries in the books of accounts capitalizing the hedging cost to the cost of assets denoted that the same was capital in nature. The Ld. AR had pointed out to us that, AS-11 notified by ICAI, as amended in 2003, provided that the foreign exchange loss arising out of foreign currency fluctuations in respect of fixed assets acquired out of foreign currency loans was to be routed through Profit & Loss Account. However, in the relevant FY 2011-12, the ICAI had modified Para 46A of AS-11 in December 2011, in terms of which the company now had an option to either debit such foreign exchange loss to the Profit & Loss Account or capitalize the same to the cost of assets. The assessee, in the present case, chose the latter option. Merely because the assessee chose the latter option would not be determinative of the character of the cost. It is by now trite in law that, the entries whether the assessee is entitled to a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal depreciation @ 10% on the assets which were purchased and put to use on the latter half of earlier A.Y. 2011-12. The AO noted that the issue relates to the allowability of balance additional depreciation in the subsequent assessment year on the assets which were put to use for less than 180 days for the financial year relating to preceding assessment year. The AO was of the opinion that there was no provision in the Act for claiming in the subsequent financial year the balance 50% of additional depreciation, when the assessee had claimed initial 50% of additional depreciation in the year of purchase of asset as it is used for less than 180 days in terms of proviso to section 32(1) of the Act. According to him, such practice is not permissible, and the additional depreciation is allowable on plant & machinery which are purchased in the year and put to use in the same year. He therefore disallowed the claim of the assessee. On appeal, the DRP confirmed the action of the AO. Aggrieved, the assessee is before us. 10.2 We have heard both the parties and also perused the relevant material available on record. The Ld. AR for the assessee brought to our notice that this issue is no lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for the benefit of the assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purpose of business. The proviso to Clause (ii) of the said Section makes it clear that only 50% of the 20% would be allowable, if the new plant and machinery so acquired is put to use for less than 180 days in a financial year. However, it nowhere restricts that the balance 10% would not be allowed to be claimed by the assessee in the next assessment year. 9. The language used in Clause (iia) of the said Section clearly provides that "a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under Clause (ii)". The word "shall" used in the said Clause is very significant. The benefit which is to be granted is 20% additional depreciation. By virtue of the proviso referred to above, only 10% can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10% additional deduction can be availed in the subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 06.03.2017 passed in T.C.A.No.157 of 2017, titled Commissioner of Income-Tax, Madurai vs. M/s.Shri.T.P.Textiles Private Limited: i.M/s. Multivista Global Ltd. vs. The Asst. Commissioner of Income Tax, TCA. No.402 of 2013 ii.M/s. Brakes India Ltd. vs. The Deputy Commissioner of Income Tax, TCA. No.551 of 2013 iii.M/s.AbiShowatech (India) Ltd. VS. The Deputy/Asst. Commissioner of Income Tax, TCA. Nos.699 to 702 of 2013 4.To be noted, at the point in time when the appeal was admitted, vide order dated 18.04.2016, the following substantial questions of law were framed: i. Whether the Tribunal was right in law in holding that the Commissioner of Income Tax has rightly invoked jurisdiction under Section 263 of the Act ? ii. Whether the allowance of additional depreciation by the Assessing Officer after eliciting replies from the assessee could be revised under Section 263 of the Act without establishing that the assessment order was erroneous and prejudicial to the interest of the Revenue ? and iii. Whether the Tribunal was right in law in holding that the assessee is not entitled to claim additional depreciation during the year in respect of additions made to fixed assets in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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