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Facts
Cross appeals were filed by the Assessee and the Revenue against an order of the CIT(A). The assessee is a wholly-owned subsidiary of Caterpillar Commercial S.A, Belgium. The appeals arise from an order concerning assessment year 2014-15.
Held
The Tribunal held that the reduction in AE sales cannot be a factor to reject idle capacity adjustment. Forex loss should be treated as an operating expense, but only actual forex translation, not notional loss. The issue of idle capacity adjustment was remitted to the TPO. The depreciation on software was decided in favor of the assessee. The disallowance for reimbursement of seconded employees cost was deleted.
Key Issues
The key issues involved the rejection of idle capacity adjustment, treatment of foreign exchange loss, exclusion/inclusion of comparable companies, depreciation on software, and disallowance of reimbursement of seconded employees cost.
Sections Cited
143(3), 92CA, 92C(3), 92D, 133(6), 10B(3)(ii), 40(a)(i), 195, 192, 9(1)(vii), 43A
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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
O R D E R PER S. R. RAGHUNATHA, AM: These cross appeals filed by the Assessee and the Revenue are arising out of order of Commissioner of Income Tax (Appeals)-18, Chennai u/s. 143(3) r.w.s. 92CA (3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the assessment year 2014-15 dated 07.03.2023. Since, facts are identical and issues are common, for
At the outset, we find that there is a delay of 02 days in appeal filed by the revenue. After hearing both the parties, we find that there is a reasonable cause for the revenue in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the revenue for adjudication.
The assessee has raised the following grounds of appeal in IT(TP)A No.: 42/CHNY/2023:
1. 1. Legal Grounds 1(a) On the facts and circumstances of the case and in law, the order dated November 1, 2017, passed by learned Transfer Pricing Officer (‘TPO’) is bad in law being barred by limitation, as it is passed beyond the time limit as prescribed under Section 92CA (3A) read with Section 153 of the Act, Accordingly, the transfer pricing order dated November 1, 2017, deserves to be quashed.
2. General Grounds 1(a) The order passed by the Learned (‘Ld.’) Commissioner of Income Tax (Appeals)-18, (‘CIT(A)’) in pursuance of the grounds filed by the Appellant against order under Section 143(3) r.w.s. 92CA of the Income-Tax Act, 1961(‘the Act’), is bad in law and on facts. 1(b) The Ld.CIT(A) /Assessing Officer has erred in law and on facts by failing to record an opinion that any of the conditions in section 92C(3) of the Act were satisfied and erroneously disregarded the TP study maintained by the Appellant as per Section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 (‘the Rules). On the facts and in the circumstances of the case and in law, the Ld. CIT(A) / Ld. TPO / Ld. AO erred in the following grounds: Manufacturing of Earthmoving Equipment Segment
3. Erroneous Rejection of Economic Adjustments - Idle Capacity
:-3-: IT(TP) A. No:42 /Chny/2023 & 3(a) Erred in not allowing appropriate economic adjustments when applying Transactional Net Margin Method, in accordance with the provisions of Rule 1 OB (3) of the Rules, to eliminate the material differences between the Assessee and the comparable companies. 3(b) Erred in rejecting the claim for idle capacity adjustment, based on erroneous assumption that idle capacity adjustment should be provided only at the starting phase of operations, without appreciating the peculiar business reasons and global economic parameters influencing the business of the Appellant for the year under consideration and the material placed on record to substantiate the claim for capacity underutilization and the need for such adjustment. 3 (c) Erred in law and on facts in rejecting the idle capacity adjustment on the ground that only the AE's sales were affected on account of reduced demand, without appreciating the fact that the Appellant is neither a contract manufacturer not does it have any earmarked capacity for sale to its AEs. Erred in not appreciating that the Appellant is a licensed manufacturer, which assumes normal business risks with respect to its manufacturing operations and bears the risk of underutilized capacity. 3(d) Erred in law and on facts by merely confirming the consideration of ratio of Cash Profit over the Operating Costs as the profit level indicator of the Appellant which resulted in adjusting only the depreciation and not the other fixed costs incurred by the Appellant. 3(e) Erred in law and on facts in arbitrarily rejecting the appellant's request to obtain the capacity utilization data from the comparable companies by virtue of powers vested with the TPO under section 133(6) of the Act as upheld by various Tribunals. Erroneous Rejection of Economic Adjustments - Non Cenvatable Customs Duty Adjustment 3(f) Erred in law and on facts in rejecting the claim of non-cenvatable customs duty adjustment in the Machine & Parts Segment, without appreciating the fact that the comparable companies do not bear significant additional cost of the non-cenvatable customs duty due to largely indigenized operations. 3(g) Erred in denying the claim of appellant merely on the grounds that appellant could not indigenize the manufacturing operations, thereby disregarding trite law that the AO/TPO does not have the jurisdiction to challenge the commercial wisdom of the appellant.
4. Erroneous Rejection of Economic Adjustments - Foreign Exchange Gain/ Loss
:-4-: IT(TP) A. No:42 /Chny/2023 & 4(a) Erred in law and on facts in not excluding foreign exchange losses for the year while computing the operating margins, without appreciating that the loss on foreign exchange fluctuation was extraordinary in nature as compared to comparables, and predominantly comprises of unrealized foreign exchange fluctuation loss/gain on restatement. 4(b) Erred in disregarding the definition of Safe Harbour Rules issued by the Central Board of Direct Taxes ('CBDT') which explicitly excludes loss/ gain arising on account of foreign exchange currency fluctuations for purposes of computing the operating mark-up.
5. Entity Level Adjustment 5(a) Grossly erred in law and on facts while applying TNMM by computing the transfer pricing adjustment on the entire operating cost including third party cost, instead of restricting the adjustment to the proportion of international transactions entered by the Appellant with its AEs to total cost. Software Development Services Segment 6. Rejection of Comparable Companies by Ld. AO/TPO 6(a) Erred in law and on facts in arbitrarily rejecting comparable companies selected by the Appellant as functionally not comparable namely- i. Akshay Software Technologies Limited, ii. Kals Information Systems Ltd., and iii. Sasken Communication Technologies Ltd. 6(b) Erred in law and on facts in arbitrarily rejecting the comparable company namely Helios & Matheson Information Technology Ltd with different financial year ending thereby disregarding the various judicial rulings which has upheld that comparables should not be rejected merely on the reason that they follow different financial year 6(c) Erred in law and on facts in arbitrarily rejecting the comparable company namely Spry Resources India Pvt. Ltd. on an unreasonable ground that the said company has double the amount of sale proceeds as outstanding receivables. 6(d) Erred in law and facts in arbitrarily rejecting the additional comparable companies proposed by the Appellant.
7. Selection of additional Companies by Ld. AO/ TPO 7(a) Erred in law and on facts by arbitrarily confirming selection of Thirdware Solution Ltd. without establishing functional and risk comparability
:-5-: IT(TP) A. No:42 /Chny/2023 & 7(b) Erred in law and on facts by arbitrarily confirming inclusion of S Q S India BFSI Ltd as a comparable company without appreciating that the same fails the related party transactions filter of more than 25% on sales. Erred in law and on facts in not appreciating that related party transactions filter is calculated as total related party transactions (including revenue and expenses) as a percentage of total sales.
8. Risk Adjustment 8(a) Erred in law and on facts in not considering economic adjustments on account of the difference in the risk profile of the Assessee and the comparables and ignoring the business / commercial reality that the Appellant undertakes routine business risks as against comparable companies that are full-fledged risk-taking entrepreneurs in the IT Segment of the Appellant The revenue has raised the following grounds of appeal in ITA No.: 717/CHNY/2023:
1. The order of the Id. Commissioner of I.T. (Appeals) is erroneous on facts of the case and in law.
2. The learned CIT(A) erred in deleting the addition of Rs. 75,70,00,000/-, - made on account of disallowance of foreign exchange fluctuation loss under the head finance cost and failed to appreciate the fact that since the ECB loan was taken by the assessee for acquisition of indigenous assets, the notional foreign exchange fluctuations loss incurred for capital purposes is not allowable, as it is not revenue in nature. 2.1 The learned CIT(A}erred in deleting the disallowance of notional loss arising out of foreign exchange loss on restatement of External Commercial borrowings, without appreciating the fact that the day to day profits of the assessee are not affected due to exchange loss fluctuation on restatement of External Commercial borrowing, and the same shall have effect only at the time of settlement of the borrowings, and therefore the notional loses incurred for capital purpose are not allowable as a deduction.
3. The learned CIT(A) erred in deleting the addition made towards provision made for obsolescence stock amounting to Rs. 6.50 crores, without appreciating the fact that the assessee had created only a provision for obsolete stock, and as per the provisions of the Income tax Act, no provisions created in the accounts are allowable as a deduction in computing the taxable income of an assessee. 3.1 The learned CIT(A) erred in deleting the addition made towards provision made for obsolescence stock, without appreciating the fact that the assessee had created provisions for obsolescence stock, which is in :-6-: IT(TP) A. No:42 /Chny/2023 & deviation of the regular accounting system followed by the assessee, in as much as no such provisions were created in the earlier assessment years.
4. The learned CIT(A) ought to have appreciated the fact that the assessee had only acquired a license to use the software, and further classified the same as "intangible asset" in the books of the assessee, as such the depreciation rates as applicable to "licenses" as stated in Part B of New Appendix-1 of the IT Rules, which is 25% shall only be applicable to such acquisition of license. 4.1 The learned CIT(A) erred in allowing the depreciation on software licence at the rate of 60% as applicable to computers, without appreciating the fact that the software license is an intangible asset, and the applicable depreciation on such intangible asset is only 25%, as per Part B of New Appendix-1 of Income tax Rules.
5. The learned CIT(A) erred in directing the Assessing Officer to delete the addition made towards u/s. 40(a)(i) of the IT Act amounting to 36,06,88,000-, after verification of the tax deducted at source u/s.192 of the IT Act on the salary payments and reimbursements in respect of the seconded employees, without appreciating the fact that reimbursement of secondment charges paid to the AE's shall attract TDS as per the provisions of 195 of the IT Act, as "fees for technical services". 5.1 The learned CIT(A) erred in directing the Assessing Officer to delete the addition made towards u/s. 40(a)(i) of the IT Act after verification of tax deducted at source u/s.192 of the IT Act, without appreciating the fact that the disallowance made was on account of non deduction of TDS u/s. 195 of the IT Act on foreign reimbursements on secondment expenses of the seconded employees to the AEs and not on the issue of non deduction of TDS u/s.192 of the IT Act. 5.2 The learned CIT(A) ought to have appreciated the fact that the employees seconded to the assessee company had performed technical and managerial services in India, as such the reimbursements effected to the foreign AE's would partake the character of " fees for technical services" on which tax is liable to be withheld as per the provisions of section 195 rws 9(1)(vii) of the IT Act and the relevant DTAAs.
6. For these grounds and any other ground including amendment of grounds that may be raised during the cdurse of the appeal proceedings, the order of Id. CIT(A) may be set aside and that of the Assessing Officer be restored.
The brief facts of the case are that the assessee is a company and wholly owned subsidiary of Caterpillar Commercial S.A, Belgium which in turn is a wholly owned subsidiary of Caterpillar Inc. during the year the assessee has acquired Bucyrus India Pvt. Ltd. The assessee operates in 6 segments, of which the TPO
:-7-: IT(TP) A. No:42 /Chny/2023 & 3 segments i.e. Manufacturing segment, Software Development Segment and Marketing Support Services Segment. The Assessing Officer while completing the assessment has made multiple addition/disallowances viz., Disallowance of Notional forex loss, Disallowance of Provision for Obsolescence, Disallowance of capital expenditure, Disallowance of Stamp duty, Restriction on quantum of depreciation on Software and Printer, Disallowance u/s.40(a)(i) on Reimbursement of Secondment cost. The ld.CIT(A) has partially allowed the appeal of the assessee and now both the assessee has filed an appeal in IT(TP)A.No.42/Chny/2023 and the Revenue has filed appeal in ITA.No.717/Chny/20. We shall first take up the Assessee’s appeal IT(TP)A.No.42/Chny/2023
The Assessee has raised grounds of appeal in relation to the adjustment in Manufacturing segment and Software Development Segment and also raised a specific ground of appeal no. Legal Grounds 1[1(a)] stating that TP order is barred by limitation as it is passed beyond the time limit prescribed under section 153. The Assessee has not pressed this grounds and as such this ground is dismissed. Similarly, the Assessee had raised General Grounds vide ground nos. 2 [1(a) and 1(b)] which is also not pressed as they are generic in nature and as such we dismiss these grounds of appeal.
Under Manufacturing segment, the Assessee has raised the following Grounds of appeal: a) Erroneous rejection of Economic Adjustments – Idle Capacity b) Erroneous Rejection of Economic Adjustments – Non Cenvatable Customs
Brief facts in relation to manufacturing segment is that the Assessee benchmarked the international transaction under TNMM and as per TP study the PLI of the Assessee was OP/OR and for this segment the Assessee has reported a margin of 9.86% (adjusted margin after idle capacity cost) with 5 comparable companies margin of 6.42% and thus substantiated its international transaction is at arms length. The TPO has accepted the most appropriate method i.e. TNMM adopted by the Assessee but proposed to change the PLI by adopting Cash profits/Operating Cost and also proposed to reject the adjustment for idle capacity and considered forex loss as operating expense while computing the margin of the Assessee and arrived at a revised margin of Assessee at -2.38%. Further, the TPO brought in additional comparable with totally 6 comparable margins with a margin of 7.46% and ultimately held that the international transaction is not at arm’s length.
In relation to the first ground of appeal i.e. Idle Capacity adjustment, the brief facts as submitted by the Assessee is that within the Manufacturing division, the Assessee had two units viz., Material Handling Unit (MHU) and Building and Construction Products Unit (BCP). The BCP Unit is a relatively new assembly line at Thiruvallur factory (only 3rd year of operations). Both these units together achieved a capacity of only 23% of the installed capacity. Accordingly, the claim of the Assessee is that material disparities in the utilisation of capacity and the level of absorption of the fixed costs between the Assessee and the comparable companies should be :-9-: IT(TP) A. No:42 /Chny/2023 & eliminated. Accordingly, the Assessee has claimed that the capacity achieved in the immediately preceding two years is around 43% and therefore it has sought for considering certain fixed cost at 43%. However, the TPO did not grant this adjustment on the reasoning that the decline in the BCP unit is not significant compared to earlier years. Further, TPO has also observed that the decline in MHU unit, which is in existence for a longer period of time, is much more due to the fact that the sales to AE has declined significantly. Accordingly, TPO rejected the idle capacity adjustment. The CIT(A) upheld the order of the TPO by observing that the capacity of the comparable companies/industry is unaffected and that it is only the business of the Appellant with respect to the AE sales was affected due to reduced demand from the AE which does not warrant any capacity adjustment.
9. The Ld AR invited our attention to Rule 10B(3)(ii) and submitted that material differences between the transactions of the assessee being compared with that of the comparable/s that affect the profits from such transactions, then reasonably accurate adjustments ought to be made to eliminate the material effect of such differences. In this regard, the Ld AR submitted due to global recession (pg. 1480 of PB) there was drop in orders and therefore the Assessee could achieve only 23% (1610/7000) of the installed capacity. The Appellant does not have committed capacity in relation to AE and hence the Appellant has to bear market and capacity risk. Accordingly, the Appellant has in its TP document sought for idle capacity adjustment by reckoning only 43% of fixed cost as operating expense which is based on the Appellant’s own previous three years average capacity. The Ld AR submitted that as a second approach, the capacity details of comparable companies have to be considered. Further, only details of 2 comparable is available in public domain,
:-10-: IT(TP) A. No:42 /Chny/2023 & TPO could collate the data by issuing notice 133(6) for the remaining comparable companies and then allow appropriate adjustment. The third and last approach of the Appellant is on without prejudice basis that industry average capacity as reported by RBI (Pg 1578 of PB) and FICCI (Pg 1603 of PB) could be considered for arriving at the quantum of idle capacity utilisation adjustment. The Ld AR has also refer to various judicial precedents including that of the jurisdictional Tribunal. The Ld DR on the other hand vehemently argued and emphasised that the TPO and CIT(A) have brought out categorical reasoning that granting of capacity adjustment is unwarranted in the present case as the decline in the capacity is mainly due to the fact that sales to AE has reduced significantly.
We have considered the rival contentions and also perused the material on record. In our view, the first and foremost issue to be decided is whether the reduction of AE sales can be a factor to reject idle capacity adjustment. We find that it is an undisputed fact the Appellant is a full-fledged entrepreneur bearing all risks and it is also an admitted fact that the Appellant and AE do not have any arrangement for committed no of units, that being the case merely because the sales to AE is reduced cannot be a factor to reject idle capacity adjustment. In this context the Appellant has also relied on the decision of the Bangalore ITAT in the case of Denso Kirloskar [2022] 136 taxmann.com 405 wherein it is held as under:
“7. The assessee in the transfer pricing study has applied Transaction Net Margin Method (TNMM) as the most appropriate method and basis that the assessee concluded that the international transactions at arm's length price (ALP) in arriving at the operating profit margins of the assessee. While computing the ALP the assessee made certain adjustments to its operating cost base. One of the adjustments thus made is towards capacity utilization. The assessee is dependent on the demands from Toyoto Kirloskar Motor Ltd
:-11-: IT(TP) A. No:42 /Chny/2023 & (TKML) for its production. The assessee has set up a production line to cater to TKML's needs. However, due to reducing demand from TKML, the assessee was not able to operate at its optimum capacity and could not recoup its fixed costs. The assessee is operating at 46.88% of its installed capacity whereas the comparable companies chosen by the assessee operated at an average of Rs. 68.43%. The assessee therefore made an adjustment for under utilization of the capacity.” “11. We heard the rival submission and perused the materials on record. The assessee submitted the capacity utilization data of 35 companies (pages 26 and 27 of the additional evidence compilation) and from the details as submitted by the Ld AR, it is noted that the assessee is functioning at a capacity lower than the industrial average. It is also noticed that out of the 68 comparables taken by the assessee in the TP study and which is accepted by the TPO, the assessee has submitted the capacity utilization of more than 50% of the details.” “14. Considering the decisions Hon'ble Tribunal in the case of Continental Automotive Components India (P.) Ltd. (supra) and Moog Control (India) (P.) Ltd. (supra), we are of the considered view that the adjustment for capacity under utilization needs to looked at afresh and hence, we remit the issue back to TPO/AO.”
In view of the above principle and by respectfully following the same we also hold that merely because sales to AE is reduced cannot be a factor to reject idle capacity adjustment. The Ld DR also stressed on the contention of the AR that BCP Unit in the initial year of operation cannot be accepted because the actual dip in the capacity is in respect of the MHU unit which is in existence for around 7 years. In this regard, we note that any manufacturing unit in the initial year of operation will not be able to achieve the optimum capacity due to various teething issues and more importantly the huge fixed cost which it may have to incur. Therefore, generally in the start-up phase idle capacity adjustment is granted but in the instant case the facts are quite peculiar where one unit (i.e. BCP unit) is in the start-up phase and the other unit (i.e. MHU unit) has crossed the start-up phase as it is in existence for around 7 years and in the given facts of the case admittedly there is decline in capacity in both the :-12-: IT(TP) A. No:42 /Chny/2023 & MHU unit is much more than that of the BCP Unit. In our considered view idle capacity could arise because of various reasons like start-up phase, force majeure, recession, industry/sector specific reasoning etc. and it is not restricted to start-up phase. In the instant case, the Assessee has pointed out that due to global recession there was a decline in export sales to AE, this fact is also acknowledged by the TPO and he has also given a specific finding that only AE sales in reduced but Non-AE sales was uniform. This apart the available comparable companies average capacity is as high as 62.38% and even the industry average capacity as published by RBI and FICCI is around 70% whereas the capacity achieved by Assessee is only 23%. All these factors goes to show that due to global recession there seems to be a decline in the capacity of the Assessee, which deserves to be appropriately adjusted for idle capacity. Accordingly, we hold that idle capacity adjustment is allowable. In this regard, we find that the Assessee has proposed 3 different approaches/basis in computing the quantum of idle capacity adjustment. However, both the lower authorities have neither considered or adjudicated on the same. Hence in the interest of justice, we remit this issue to the file of TPO to factually examine and consider any one of the approaches in quantifying the amount of idle capacity adjustment. Accordingly this ground/issue is allowed for statistical purposes.
Since the primary issue is remitted to the file of the TPO, we also direct the TPO to examine the issue of necessity of granting custom duty adjustment in light of the principle laid down by the jurisdictional Tribunal in the case of Doowon Automotive Systems India Pvt Ltd [IT(TP)A.NO.7/Chny/2018. The Appellant is directed to furnish the necessary details/working in relation to the same. The TPO
:-13-: IT(TP) A. No:42 /Chny/2023 & Assessee may decide this issue in accordance with law and the judicial precedence referred to hereinabove. This ground of appeal is allowed for statistical purposes.
Next ground of appeal is regarding treatment of forex loss as operating expense while computing the margin of the Appellant. The TPO has held that since in the TP documentation it is mentioned that the Appellant bears Forex risk, the Forex loss should be considered as operating in nature. Before the ld.CIT(A) the Appellant seem to have raised the contention that Forex loss in entirety should be treated as non-operating and on a without prejudice basis, the Appellant raised alternate contention that only realised Forex loss should be considered as operating in nature and unrealised Forex loss which is notional loss ought to be treated as non- operating. In this regard, the CIT(A) had also called for a remand report from the TPO. The TPO in the remand report has submitted that though the break-up of forex losses (i.e. realised/actual and unrealised/notional) were furnished, the Assessee did not furnish substantive evidence to show that certain losses were on account of restatement. The Ld. AR and the Ld. DR reiterated the arguments raised before lower authorities. In our view, this Tribunal has been consistently holding that translation in forex loss or gain ought to be treated as operating in nature while computing the margins of the Assessee as well as the comparable companies. Accordingly, we hold in principle that forex loss should be treated as operating expense. However, whether the entire quantum of forex loss (i.e. realised/actual and unrealised/notional) should be treated as operating expense is concerned we hold it is only the actual forex translation should be considered as operating expense and we find merit in the contention of the Ld.AR. Accordingly, we hold that only actual
:-14-: IT(TP) A. No:42 /Chny/2023 & Forex loss should not be treated as operating expense. Accordingly this ground of appeal is partly allowed in favour of the Appellant.
The last ground of appeal under manufacturing segment is in relation to entity level adjustment. In this regard, the Ld.AR submitted that this ground would become academic basis our decision in the earlier grounds of appeal. Accordingly, we are not adjudicating this grounds of appeal and the TPO is at liberty to reconsider the same at the time of giving effect to this order.
Software Development segment: 15. The brief facts relating to this issue is that the Appellant has adopted TNMM as most appropriate method and arrived at Assessee margin of 14.98% vis a vis 7 comparable companies margin of 14.66%. The TPO rejected 5 comparables of the Assessee and carried out independent search identifying 6 comparables, making total no of comparable companies at 8 with average margin of 29.40%. The CIT(A) excluded 4 comparables out of the 6 comparables introduced by the TPO and refused to accept inclusion of 5 comparable companies. Broadly the contention under this segment is mainly on exclusion and inclusion of comparable companies.
Exclusion of comparable companies selected by TPO: A. SQS India BFSI Ltd. 16. Before us, the Ld AR submitted that he is not pressing on exclusion of this comparable company and as such this comparable is to be retained in the final set of comparables. B. Thirdware Solutions Ltd
:-15-: IT(TP) A. No:42 /Chny/2023 & 17. The Ld.AR submitted that this comparable company is functionally dissimilar and it has already been considered and excluded by this Hon’ble Tribunal in the Assessee’s own for the immediately preceding AY 2013-14 in ITA.No.2740/Chny- 2017 vide order dated 11.06.2024 at para 3.3 “We find that for AY 2013-14, this entity has been excluded by Mumbai Tribunal in the case of Lionbridge Technologies P. Ltd. (101 Taxmann.com 41) on the ground this entity was into acquisition / purchase of hardware and software including software as a service. This entity was also engaged in software development, implementation and support services. Therefore, it earned income from products and services. On the other hand, the assessee was solely into software services. The bench, relying on the decision of Delhi Tribunal in the case of St-Ericsson India (P.) Ltd. v. Addl. CIT [2017] 79 Taxmann.com 207 (Delhi - Trib.), held that this was not a valid comparable. Following the same, we direct for exclusion of this entity.”
Following the above decision, we direct the exclusion of this entity.
Inclusion of comparable companies sought by Appellant:
Spry Resources India Pvt Ltd 18. We have examined the material available on record and note that though this company is functionally comparable, the Lower authorities have rejected this company only the ground that sales revenue has doubled. Considering the argument of the ld.AR that though the said company is passes all filters applied by the TPO including the functionality. Hence, we find force in the argument of the ld.AR and found that the reasoning given by the lower authorities is not sound enough since the TPO has not established how this has influenced the margin of the said comparable. Further, the lower authorities do not dispute that this company is functionally comparable. Accordingly, we hold that this comparable company should be included in the final list of comparable companies.
:-16-: IT(TP) A. No:42 /Chny/2023 & 19. The Ld AR submitted that if Thirdware Solutions Ltd is excluded and Spry Resources Pvt Ltd is included then margins of the Assessee would be within the tolerance range and adjudication on other comparable inclusion/exclusion would be academic in nature. Similarly, the Ld AR has also submitted that ground no.8 would also become academic. Accordingly, we are not dealing with inclusion/exclusion of other comparable companies and on the ground of risk adjustment.
Since the main issue is addressed in favour of the Appellant, the other grounds of appeal i.e. ground nos 3.1 to 3.4 and 4.1 becomes academic and hence we are not adjudicating the same. In the result the appeal of the Assessee is partly allowed.
ITA.No.717/Chny/2023
The Revenue has raised grounds of appeal in relation to the following issues: a. Disallowance of notional forex loss b. Disallowance of provision for Obsolescence c. Depreciation on Software d. Disallowance under section 40(a)(i) for reimbursement of seconded employees cost.
Disallowance of notional forex loss
Ground nos.2 & 3 relates to disallowance of notional forex loss The AO has disallowed notional forex loss of Rs.75,70,00,000/- in relation to restatement of ECB on the ground that this loss would not affect the day to day operations and would have impact only on actual repayment at the time of :-17-: IT(TP) A. No:42 /Chny/2023 & settlement. Before the CIT(A), the Assessee has submitted that the ECB was used for purchasing assets within India and hence the Section 43A of the Act was not attracted and moreover the assets were already put to use therefore, the forex loss on restatement is revenue expenditure. The CIT(A) by following the jurisdictional Tribunal decision in the case of DCIT Vs Green Star Fertilizers Ltd In ITA.No.34 & 35/2020 dated 31.12.2020 allowed the same. The Ld DR contended that Forex loss is in relation to capital transaction and hence it should be treated as capital expenditure. Further, Ld DR also relied on the decision of this Tribunal in Assessee’s own case in ITA.No.2749/Chny/2017 dated 11.06.2024 wherein the issue was remitted back to the AO for fresh adjudication as there was no finding as to usage of the loan. Respectfully following the same, we remit this issue to the file of the AO for fresh adjudication for bringing on record the facts such as the whether the assets were purchased in India and it has already been put to use and then decide this issue in light of the ratio laid down by jurisdictional Tribunal in the case of Hyundai Motor India Ltd Vs DCIT [2017] 81 taxmann.com 5. Hence, the corresponding ground is allowed for statistical purposes.
Disallowance of provision for Obsolescence
Ground nos.3 & 3.1 The AO disallowed this item as accordingly to him no provision is allowable as per the Act. The CIT(A) has allowed the same as the Assessee has been consistently following this method of valuation of closing stock. The Ld DR reiterated that this provision for obsolescence is not allowable. The Ld AR relied on Karnataka High Court decision in the case of Cit Vs IBM [2015] 55 taxmann.com 515 wherein provision for obsolescence was allowed. Further, Ld AR contended that in case the provision is not allowed then appropriate adjustments to :-18-: IT(TP) A. No:42 /Chny/2023 & AY 2013-14. We find that this issue is squarely covered against the Assessee by the order of this Tribunal in Assessee’s own case in ITA.No.2749/Chny/2017 dated 11.06.2024 wherein it is held that provision for old stock is not allowable as the loss could be allowed when it is actually sold. “We are of the considered opinion that mere provision of old stock could not be allowed to the assessee by way of deduction in the computation of income. The assessee would be following a definite accounting policy to value the book stocks and the profit or loss arising therefrom would accrue only at the time of sale thereof.”
Respectfully following the same, we also hold that the provision is not allowable as deduction for AY 2014-15. Nevertheless, we find that the alternate argument of the Assessee merits consideration i.e. since the provision has been disallowed in the immediately preceding year AY 2013-14 and we have also now disallowed the same in the subject AY 2014-15, we hereby direct the AO to rework the opening stock and closing stock of AY 2014-15 after taking into consideration the aforesaid disallowances made in AY 2013-14 & 2014-15. This ground is disposed off with the above direction.
Depreciation on Software 25. Ground no.4 & 4.1 The AO has restricted that rate of depreciation on software as according to him it is in the nature of intangibles. The CIT(A) allowed higher depreciation on software by following the jurisdictional High Court decision in the case of CIT Vs Computer Age Management Services P Ltd [2019] 109 taxmann.com 134. This issue is squarely covered in favor of the Assessee by the decision of this :-19-: IT(TP) A. No:42 /Chny/2023 & Tribunal in ITA.No.2749/Chny/2017 dated 11.06.2024. “We find that this issue is covered in assessee’s favor by the decision of Hon’ble High Court of Madras in the case of Computer Age Management Services (267 Taxman 146) wherein it has been held that where software license acquired by assessee was in nature of software application, the assessee would be eligible to claim depreciation at 60%.”
Respectfully following the same we decide this issue against the revenue and in favour of the Assessee. This ground of appeal is dismissed.
Disallowance under section 40(a)(i) for reimbursement of seconded employees cost: 27. Ground nos.5, 5.1 & 5.2 The AO disallowed the reimbursement as according to him it is in the nature of “fees for technical services”. The CIT(A) allowed the same basis the fact that tax has already been deducted under section 192 and also by following the Tribunal decision in Assessee’s own case for AY 2008-09. We find this issue is squarely covered in favor of the Assessee by the decision of this Hon’ble Tribunal in ITA.No.2749/Chny/2017 dated 11.06.2024. “Upon perusal of agreement, it emerges that the assessee has availed services of employees of its group entities. The same was to facilitate business operations of the assessee. These seconded employees have worked under the control and supervision of the assessee which is evident from the fact that the assessee, as an employer, has deducted due TDS u/s 192. Therefore, these payments have already suffered TDS. The assessee has merely reimbursed actual salary to its AE. The same were merely in the nature of reimbursements only and do not include any element of income. The risk and reward of the work performed by the deputed employees was with assessee. Therefore, Ld. DRP, in our opinion, is not correct to treat the same as Fees for Technical Services which would require separate TDS. Accordingly, impugned disallowance as made u/s 40(a)(i) stand deleted.”
Respectfully following the same we decide this issue against the revenue and in favor of the Assessee. This ground of appeal is dismissed.
The Appeal of the revenue is partly allowed for statistical purposes.
Order pronounced in the open court on 06th June, 2025 at Chennai.