TYROLIT (I) SUPERABRASIVE TOOLS PRIVATE LIMITED,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -5(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 539/Bang/2021 Assessment Year : 2012-13 M/s. Tyrolit (I) Superabrasive Tools Pvt. The Deputy Ltd., Commissioner of Income No. 1D, 2nd Phase, Peenya Tax, Vs. Industrial Area, Circle – 5(1)(1), Bangalore – 560 058. Bangalore. PAN: AACCT2032Q APPELLANT RESPONDENT Assessee by : Smt. Suman Lunkar, CA : Smt. Priyadarshini Basaganni, Revenue by JCIT (DR) Date of Hearing : 30-12-2021 Date of Pronouncement : 28-02-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order passed by the Ld.CIT(A)-7 Bangalore, dated 23/03/2017 for assessment year 2012- 13 on following grounds of appeal: “1. The learned Commissioner of Income-Tax (Appeals) has erred in dismissing the appeal and hereby confirming the order passed by the learned Assessing Officer. The order passed by the learned Assessing Officer being bad in law and void-ab-initio was required to be quashed instead of being confirmed. 2.1 In any case and without prejudice, the learned Assessing Officer has erred in disallowing the Forex Loss of Rs. 94,93,766 holding that the same was on account of restatement of Advance of External Commercial Borrowings (ECB) and capital in nature was not allowable u/s 43A, while the learned CIT(A) has erred in confirming the disallowance on the erroneous appreciation of facts that the learned Assessing Officer had held that the

Page 2 ITA No. 539/Bang/2021 notional loss, prior to the date of settlement, was speculative in terms of section 43(5) of the Act and treating it to be a Forex loss attributable to a derivative transaction, by referring to CBDT Instruction No. 3 of 2010 dated 23.3.2010. The conclusions drawn by the Assessing and Appellate Authorities are wholly erroneous, both on facts and law and thus are to be rejected. 2.2 In any case, the learned CIT(A) has erred in holding that the Forex Loss was on account of foreign exchange derivative transaction and same being an unascertained and notional liability/loss is not an allowable expenditure. The conclusion drawn is wholly erroneous both on facts and applicable law and is to be rejected. 2.3 In any case and without prejudice, the authorities below have erred in not appreciating the fact that out of the total Forex loss of Rs 94,93,766, only Rs 86,020 is related to forex loss on repayment of the external commercial borrowing, not borrowed for the purpose of acquiring any asset and the balance forex loss was on account of actual settlement in the assessment year and restatement of trade payables/receivables at the end of the assessment year in accordance with the mandatory Accounting Standard, but erred in treating the entire forex loss as unascertained liability and notional loss. The action of authorities below is contrary to the available facts and law applicable is to be negated and forex loss incurred is to be allowed as Business expenditure u/s 37(1) of the Act. 2.4 In any case, the disallowance made/confirmed is erroneous and excessive. 3.1 The learned Assessing officer has erred in disallowing software expenses treating it to be capital in nature and the learned CIT(A) has erred in treating the same as royalty and holding that same is allowable as revenue expenditure subject to provisions of section 40(a)(ia) of the Act. The conclusion of authorities below being contrary to facts and law applicable is to be disregarded and the software expenses are to be allowed as revenue expenditure as claimed by the appellant. 3.2 In any case and without prejudice, having treated the software expenses as capital in nature, the learned Assessing Officer ought to have allowed depreciation thereon. 4. In view of the above and on the grounds to be adduced at the time of hearing, it is requested that the impugned orders passed by the authorities below be quashed or at least the Forex loss as claimed by the Appellant be allowed, software expenses be allowed as revenue

Page 3 ITA No. 539/Bang/2021 expenditure or alternatively having treated the software expenses as capital in nature, depreciation be allowed thereon.” 2. Brief facts of the case are as under: The assessee is a wholly owned subsidiary of Tyrolit Group and is engaged in manufacturing and marketing of engineering products. It is noted by the authorities below that the machineries and tools are imported and marketed in India. The assessee filed its return of income for year under consideration on 30/11/2012 declaring Nil income. The case was selected for scrutiny and notice under section 143(2) along with section 143(1) was issued to assessee. 3. In response to the statutory notices, the representative of assessee filed before the Ld.AO requisite details as called for. The Ld.AO noticed that assessee had purchased custom built engineering software for the purpose of carrying on its business and treated the same as revenue expenditure. 4. The Ld.AO also noted that assessee restated the value of foreign currency outstanding as on 31/03/2012. The Ld.AO called upon assessee to show cause as to why the foreign exchange loss, software expenses and the management fee paid by assessee to the AE should not be disallowed. The assessee filed its submission, which after considering, the Ld.AO made following disallowances: Foreign exchange loss: Rs.94,93,766/- Management fee: Rs.16,80,397/- Software expenses: Rs. 24,786/- Aggrieved by the order of Ld.AO, assessee preferred appeal before the Ld.CIT(A). 5. Before the LdCIT(A), it was contended by the assessee that it accounted for the exchange loss/gain on foreign currency balance and forward contracts as per accounting standard 11. The assessee relied

Page 4 ITA No. 539/Bang/2021 on the decision of Hon’ble Supreme Court in case of CIT vs.Woodward Governor India Pvt.Ltd reported in 210 ITR 354 and Oil and Natural Gas Corporation Ltd. vs. CIT in Civil Appeal No.7223 of 2008. The Ld.CIT(A) after considering the submissions of assessee was of the opinion that the mark to market loss is to be treated as notional and contingent as per Circular no.3 dated 32/03/2010. 6. In respect of software expenses disallowed by the Ld.AO, the Ld.CIT(A) was of the opinion that the payment made by assessee towards acquiring the software was in the nature of Royalty and should have been subjected to TDS under section195/194J. he placed reliance on the decision of Hon’ble Karnataka High Court in case of M/s.Samsung Electronics Copany Ltd, reported in (2011) 203 Taxman 477. 7. In so far as the disallowance of management fees are concerned, the Ld.CIT(A) upheld the addition in the absence of any supporting documents to manifest the services were actually rendered. It was also observed by the Ld.CIT(A) that the nature of services as per the agreement were such that it could not be claimed as expenditure. Aggrieved by the order of the Ld.CIT(A), assessee in appeal before this Tribunal. 8. It is submitted that Ground No.1 is general in nature and do not requires any adjudication. 9. Ground no.2.1 to 2.4 is in respect of reinstatement of foreign exchange loss. We have perused submissions advanced by both sides in light of records placed before us. 10. As far as law on the issue is concerned, it is very clear that the forward contracts entered into for the purpose of protecting against loss and which has a nexus to the business of the assessee and which are on revenue account have to be allowed as a deduction. The

Page 5 ITA No. 539/Bang/2021 decisions cited relied by the Ld.AR In case of CIT vs.Woodward Governor India Pvt.Ltd reported in 210 ITR 354 and Oil and Natural Gas Corporation Ltd. vs. CIT in Civil Appeal No.7223 of 2008, by Hon’ble Supreme Court (supra) supports the claim made in this regard. 11. We, however, find that the details of forward contracts and nexus with the business of the assessee have not been submitted by assessee before the authorities below. We are therefore of the view that, while upholding the principle that losses on account of exchange fluctuation on forward covered contracts are allowable as a deduction, we hold that the factual details in this regard should be examined by the Ld.AO. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 12. Ground 3.1 to 3.2 is in respect of disallowance of software expenses. We have perused the submissions advanced by both sides on light or records placed before us. 13. We note that the authorities below disallowed the expenses incurred towards purchase of software license by relying on the decision of Hon’ble Karnataka High Court in case of M/s.Samsung Electronics Copany Ltd(supra), on the ground that payment in the form of software license was in the nature of royalty as it was the payment for a right to use the software and therefore is taxable in India. 14. The said decision by Hon’ble Karnataka High Court has been overruled by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, reported in (2021) 125 taxmann.com 432, where in the matter was remanded to the Ld.AO to examine the terms of the agreement under which right was granted to the assessee in the light of the provisions of the Double Taxation

Page 6 ITA No. 539/Bang/2021 Avoidance Agreement (“DTAA”) as to whether the same would amount to royalty. 15. Respectively following the same, with similar direction, we deem it fit and proper to remand this issue back to the Ld.AO to verify the agreement and to consider the claim of assessee in light of the principles laid down by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT(supra) Accordingly these grounds raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 28th February, 2022.

Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 28th February, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore