MITSUBISHI ELECTRIC AUTOMOTIVE,GURGAON vs. DCIT, CIRCLE- 2(1), GURGAON

PER SAKTIJIT DEY, JUDICIAL MEMBER: Captioned appeal has been filed by the assessee challenging the

final assessment order dated 04.10.2017 passed under Section 143(3)

read with section 144C of the Income-Tax Act,1961 pertaining to

2 ITA No.7512/Del/2017

assessment year 2013-14, in pursuance to directions of learned

Dispute Resolution Panel (DRP).

specific adjudication.

amount of Rs.2,63,36,331.

resident corporate entity stated to be engaged in the business of

assembly of automotive component for supply to automobile

manufactures. For the assessment year under dispute, the assessee

filed its return of income on 29.11.2013 declaring income of

Rs.73,20,89,000.

while examining the audited financial statement of the assessee,

noticed that the assessee has debited expenditure of Rs.2,63,36,331

showing it as amortization of premium on derivative on long term

borrowings. After calling for necessary details and examining them he

found that the assessee has availed two long term External

Commercial Borrowings (ECB)/Foreign Currency loans from a

3 ITA No.7512/Del/2017

Japanese entity viz. Mitsubishi Electric Corporation (MELCO)

amounting to Japanese Yen (JPY) of 511,999,000 and 730,221,000

respectively. In order to hedge the foreign currency exposer on long

term borrowings, the assessee executed currency swap contracts with

Bank of Tokyo, Mitsubishi UFJ (BTMU) on 07.06.2012 and

01.01.2013. As per the terms and conditions of currency swap

contracts, the assessee was obliged to pay fixed amount of rupee

denominated installment to BTMU. Whereas, the obligation to repay

the principal and interest amount in foreign currency to MELCO was

placed with BTMU. It was explained by the assessee to the Assessing

Officer that as per the swap contracts, the assessee was required to pay

interest @ 7.35% or 7.59%. However, for accounting purposes, the

aforesaid rates of interest were bifurcated into two portions, the first

one as interest and the other one as premium. However, the entire

amount is in the nature of finance cost. The Assessing Officer did not

accept the contention of the assessee. He observed, the availing of

loan from MELCO and the currency swap contracts are two

independent transactions. He observed, while the assessee has

incurred interest cost on ECBs, however, the currency swap

4 ITA No.7512/Del/2017

transactions are only for purpose of hedging the risk on repayment of

foreign loans and repayment thereon. Therefore, he observed that the

premium paid to BTMU in respect of hedging contracts are not

covered under Section 3(1)(iii) of the Act.

transactions between the assessee and BTMU, in reality, is in the

nature of speculative transaction covered under Section 43(5) of the

Act. With such reasoning, he disallowed the claimed deduction of

Rs.2,63,36,331.

raised objection before learned DRP. However, without much

deliberation on the issue, learned DRP endorsed the view of the

Assessing Officer.

the stand taken before the departmental authorities. Whereas, learned

Departmental Representative strongly relied upon the observations of

the Assessing Officer and learned DRP.

record.

5 ITA No.7512/Del/2017

dispute that the assessee had availed two foreign currency loans from

a Japanese entity. Such foreign currency loans are in Japanese

Currency ‘YEN’.

exchange, the assessee wanted to safeguard its interest in respect of

repayment of loans along with interest to MELCO by entering into

two currency swap contracts with BTMU. Thus, there is absolutely no

reason for doubt that the underlying transactions for which the

assessee entered into hedging contracts are the two foreign currency

loans availed from MELCO. It is also evident, the foreign currency

loans were in the nature of long term borrowings for a period of three

years. As per the currency swap contracts with BTMU, the assessee

was required to pay interest at a fixed rate of 7.35% or 7.59% in

Indian rupees as the case may be. Whereas, BTMU, in turn, was

required to pay interest to MELCO in foreign currency. In other

words, the assessee was not required to pay any interest directly to

MELCO. It is observed, for accounting purposes, the assessee had

bifurcated the fixed interest cost into two portions i.e. interest and

6 ITA No.7512/Del/2017

premium. The premium portion has been claimed as amortization

premium derivative on long term borrowings. However, in our view,

the nature and character of the fixed cost on foreign currency swap

contract is nothing but interest, therefore, allowable under Section

36(1)(iii) of the Act. As could be seen, the Assessing Officer has

refused to entertain assessee’s claim, firstly, on the ground that the

amount paid to BTMU under swap contracts is independent of the

foreign currency loan, hence, cannot be treated as interest covered

under Section 36(1)(iii) of the Act. Further, he has held that the

amount paid to BTMU is in respect of speculative transaction under

Section 43(5) of the Act.

Assessing Officer are unsustainable. As discussed earlier, as per the

foreign currency swap contracts, the assessee was required to pay

interest at a fixed rate in Rupee terms. Whereas, it is the liability of the

BTMU to pay the principal as well as interest cost on the foreign

currency loans availed by the assessee from MELCO in Japanese Yen.

Therefore, in so far as the assessee is concerned, the amount paid to

BTMU under currency swap contracts is nothing but interest cost on

7 ITA No.7512/Del/2017

foreign currency loans. Further, as discussed earlier, the underlying

transactions in relation to the currency swap contracts are the loans

availed from MELCO. It is a fact on record that on repayment of loan

to MELCO after the expiry of three years, the currency swap contracts

with BTMU were also terminated. Therefore, in our considered

opinion, the currency swap contracts are nothing but to hedge the

fluctuation in foreign currency rates for protecting the assessee from

the risk of paying more interest on the foreign currency loans due to

exchange rate fluctuations. Therefore, in our view, the transactions

relating to currency swap contracts entered by the assessee with

BTMU cannot be considered to be in the nature of speculative

transaction covered under Section 43(5) of the Act. In that view of the

matter, the deduction claimed by the assessee is allowable under

Section 36(1)(iii) of the Act.

assuming that the premium paid to BTMU in respect of currency swap

contracts cannot be termed as interest covered under Section 36(1)(iii)

of the Act, however, there cannot be any dispute that this is an

expenditure incurred by the assessee wholly and exclusively for the

8 ITA No.7512/Del/2017

purpose of its business, as, such expenditure is having a direct nexus

with the finance cost on external borrowings. That being the case, it is

otherwise allowable as deduction under Section 37(1) of the Act.

Accordingly, we delete the disallowance.

Rs.86,27,286 under Section 40(i)(a) of the Act.

Assessing Officer noticed that in the year under consideration, the

assessee had paid an amount of Rs.2,51,66,612 to Mitsubishi

Corporation, Japan towards installation changes. After calling for and

examining the necessary details, the Assessing Officer noticed that the

assessee had deducted tax at source of an amount of Rs.1,65,39,932,

whereas, he has not deducted tax on an amount of Rs.86,27,286.

When called upon to explain the reason for not doing so, the assessee

submitted that such amount is purely in the nature of reimbursement

of cost incurred towards air-tickets and hotel bookings etc. The

Assessing Officer was not convinced with the submissions of the

assessee. He observed, the travelling and hotel expenses, since, are in

connection with rendering of technical services, they also have to be

9 ITA No.7512/Del/2017

regarded as fee for technical services (FTS). Hence, the assessee was

required to withhold tax under Section 195 of the Act. Since, the

assessee has not done so, the Assessing Officer disallowed the amount

of Rs.86,27,286.

objections of the assessee upheld the disallowance made by the

Assessing Officer.

broadly submitted as under: • The amount represents reimbursement of cost of air-ticket, hotel billing etc. without any element of profit and based on third party invoices submitted by the payee; • Section 40(a)(i) cannot be invoked as, the assessee has not claimed the amount as expenditure act has capitalized and claimed depreciation. In support his contention, learned counsel relied upon the following decisions: i) SMS Demag Pvt. Ltd. vs. CIT [2010] 38 SOT 496 (Del.); ii) Mark Auto Industries Ltd. [2013] 358 ITR 43 ( P & H ); iii) M/s. Kawasaki Microelectronics vs. DDIT, (International Taxation) – ITA No.1512/Bang/2010 [ITAT – Bangalore]; iv) DCIT vs. “FIS Solution India Pvt. Ltd. – ITA No.519/Bang/2015 [ ITAT – Pune]; &

10 ITA No.7512/Del/2017

v) Pr. CIT vs. M/s. Tally Solutions Pvt. Ltd., - ITA No. 199 of 2017 - Karnataka High Court.

observations of the Assessing Officer and the learned DRP.

record.

Mitsubishi Corporation, Japan towards installation charges, the

assessee had deducted tax on an amount of Rs.1,65,39,326 by treating

it as FTS. However, on balance amount of Rs.86,27,286, the assessee

had not deducted any tax on the plea that these are purely

reimbursement of cost of air-tickets and hotel billing without having

any profit element. From the sample copies of the bills/invoices raised

on the assessee, it is observed that in so far as air-tickets and hotel

bills are concerned, the payee has raised separate invoices which do

not comprise of any amount charged towards installation of

equipments. The perusal of invoices clearly indicates that they are

towards reimbursement of cost on actual basis without any profit

11 ITA No.7512/Del/2017

element embedded therein. Therefore, in our view, no part of such

expenditure/cost incurred can be apportioned towards technical

services. Therefore, in our view, the assessee was not required to

withhold tax under Section 195 of the Act on such expenditure. Even

otherwise also, the amount in dispute was not claimed as revenue

expenditure by the assessee. Rather, the assessee had capitalized the

amount in its accounts and has claimed depreciation. In such a

scenario, the issue arising for consideration is whether section 40(a)(i)

of the Act would be applicable.

learned counsel appearing for the assessee, the ratio laid down clearly

says that section 40(a)(i) of the Act provides for disallowance only in

respect of expenditure which are revenue in nature. Therefore, the

provision does not apply to a case of the assessee whose claim is for

depreciation. In this regard, we may specifically refer to the decision

of Hon’ble Karnataka High Court in PCIT vs. Tally Solution Pvt. Ltd.

(supra).

is allowed.

12 ITA No.7512/Del/2017

Rs.6,90,154 on account of difference in rent cost incurred by the

assessee for providing accommodation to its employees and the

respective perquisite value of such residential accommodation

determined in the hands of the employees.

Assessing Officer noticed that the assessee had provided rent free

accommodation to various employees and debited expenditure in

respect thereof. After calling for and examining the necessary details,

the Assessing Officer noticed that there is difference in the quantum of

rent paid by the assessee on behalf of its employees and the amount

taxed as perquisite at the hands of the employees. Holding that, the

excess rent paid is the personal obligation of the employees which has

been discharged by the assessee and it has no nexus with assessee’s

business, the Assessing Officer disallowed the amount of Rs.6,90,154.

While deciding assessee’s objections, learned DRP upheld the

disallowance.

record.

13 ITA No.7512/Del/2017

27, The observations of the Assessing Officer would make it clear

that only reason for which the Assessing Officer disallowed the

differential amount between the rent actually paid by the assessee on

behalf of the employees and the perquisite value of rent taxed at the

hands of the employees is that it is not in connection with assessee’s

business. There is no dispute that the assessee had actually incurred

the expenditure. In fact, the Assessing Officer has allowed the

deduction to the extent of the amount treated as perquisite value at the

hands of the employees. He has disallowed the excess amount. This,

in our view, is unjustified. The perquisite value to be taxed at the

hands of the employees is determined by applying the methodology

prescribed under the rules. Therefore, it has no relation to the actual

cost incurred by the assessee. In any case of the matter, if the assessee

has incurred certain expenditure for welfare of the employees to keep

a contended and dedicated work force, keeping in view the

commercial expediency, the expenditure can be allowed under Section

37(1) of the Act.

assessee.

14 ITA No.7512/Del/2017

general ground is dismissed.

an additional ground on the issue of deduction on payment made

towards education cess and higher education cess. However, at the

time of hearing, learned counsel for the assessee did not press the

ground. Accordingly, additional ground is dismissed.

Sd/- Sd/- (G.S. PANNU ) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 11th January, 2023. Mohan Lal Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi