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T vs MOTOR COMPANY LTD.,CHENNAIVS.ACIT, CHENNAI | BharatTax

T vs. MOTOR COMPANY LTD.,CHENNAIVS.ACIT, CHENNAI

ITA 672/CHNY/2017Status: DisposedITAT Chennai24 January 2025AY 2012-13Bench: SHRI ABY T. VARKEY (Judicial Member), SHRI AMITABH SHUKLA (Accountant Member)42 pages

AI SummaryPartly Allowed

Facts

The assessee challenged transfer pricing adjustments related to corporate guarantees, brand promotion expenses (AMP), and notional royalty to its Indonesian AE. It also contested disallowances under Section 14A (for investments yielding dividend income), Section 40(a)(i) for export agency commission, and the capitalization of foreign exchange loss/hedging cost on External Commercial Borrowings (ECBs). Additionally, the denial of balance additional depreciation was disputed.

Held

The Tribunal partly allowed the assessee's appeal by directing the AO to adopt a 0.50% guarantee commission, remanding the AMP expenses issue for fresh examination as per Delhi High Court rulings, and deleting the Section 14A disallowance relating to sufficient own funds while remanding other Section 14A computations. The export agency commission disallowance, foreign exchange loss/hedging cost on ECBs, and balance additional depreciation claims were all allowed, citing various High Court and Supreme Court precedents. However, the notional royalty adjustment was upheld.

Key Issues

1. Whether corporate guarantee and letter of comfort to an AE are international transactions and their Arm's Length Price (ALP). 2. Whether brand promotion expenses for an AE constitute an international transaction and the applicability of the 'bright line test'. 3. Whether royalty can be charged from a loss-making AE. 4. Whether disallowance under Section 14A read with Rule 8D is valid when own funds exceed investments or how to compute disallowance for dividend-yielding investments. 5. Whether export agency commission paid to non-residents attracts Tax Deducted at Source (TDS) under Section 195, leading to disallowance under Section 40(a)(i). 6. Whether foreign exchange loss and hedging cost on ECB repayment for indigenous fixed assets are capital or revenue expenditures. 7. Whether balance additional depreciation can be claimed in a subsequent assessment year.

Sections Cited

143(3), 92CA(4), 92B, 92C, 92D, 92E, 92F, 10B(2)(c), 14A, 8D, 8D(2)(ii), 8D(2)(iii), 40(a)(i), 195, 195(1), 195(2), 195(3), 9(1)(vii), 43(1), 43A, 36(1)(iii), 35, 35A, 36, 48, 50, 145, 209, 211, 37(1), 32(1), 32(1)(iia), 234B, 263

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & SHRI AMITABH SHUKLA

Hearing: 11.11.2024Pronounced: 24.01.2025

आदेश / O R D E R

PER ABY T. VARKEY, JM:

1. This is an appeal preferred by the assessee against the order of the Learned Assessing Officer on 24.01.2017 passed u/s.143(3)

r.w.s.92CA(4) of the Income Tax Act, 1961 (hereinafter in short "the Act”), pursuant to the directions of the Dispute Resolution Panel-2 (hereinafter in short ‘DRP’), Bengaluru, dated 19.12.2016.

Ground Nos.1 to 4 are general in nature and therefore, it does not require any adjudication.

/Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. :: 2 ::

5 &6 are against the transfer pricing ad are against the transfer pricing adjustment of Ground Nos. 5 & Rs.1,28,90,0000/- made by the TPO in relation to the corporate made by the TPO in relation to the corporate made by the TPO in relation to the corporate guarantee and letter of comfort provided by the appellant to its AEs. guarantee and letter of comfort provided by the appellant to its AEs. guarantee and letter of comfort provided by the appellant to its AEs.

3.1 The facts as noted are that the assessee is engaged in the business The facts as noted are that the assessee is engaged in the business The facts as noted are that the assessee is engaged in the business of manufacturing two wheelers. It had of manufacturing two wheelers. It had given corporate guarantee to the given corporate guarantee to the tune of Rs.53,88,00,000/ tune of Rs.53,88,00,000/- on behalf of the foreign subsidiary M/s PT TVS on behalf of the foreign subsidiary M/s PT TVS Motor Company, Indonesia (‘AE’). The assessee had also given Letters of Motor Company, Indonesia (‘AE’). The assessee had also given Letters of Motor Company, Indonesia (‘AE’). The assessee had also given Letters of Comfort (LOC) of Rs.10,57,00,000/ of Rs.10,57,00,000/- to Banks/AE for the loans borrowed to Banks/AE for the loans borrowed by the AE. The assessee did E. The assessee didn’t charge any fee towards such corporate t charge any fee towards such corporate guarantee and LOC issued in favour of the AE. The TPO is noted to have guarantee and LOC issued in favour of the AE. The TPO is noted to have 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 made transfer pricing adjustment in relation thereto on the same lines as made transfer pricing adjustment in relation thereto on the same lines as confirmed by the DRP in the earlier year viz., 2% confirmed by the DRP in the earlier year viz., 2% of the value of of the value of corporate guarantee and LOC. corporate guarantee and LOC. Aggrieved, the assessee preferred ggrieved, the assessee preferred objection before the DRP which confirmed the action of the TPO. Now, the objection before the DRP which confirmed the action of the TPO. Now, the objection before the DRP which confirmed the action of the TPO. Now, the assessee is in appeal before us. assessee is in appeal before us.

3.2 Heard both the parties. The Ld. AR for the assessee has contended Heard both the parties. The Ld. AR for the assessee has contended Heard both the parties. The Ld. AR for the assessee has contended that since the corporate guarantee and Letter of Comfort was provided that since the corporate guarantee and Letter of Comfort was provided that since the corporate guarantee and Letter of Comfort was provided without any cost to the AE, it did without any cost to the AE, it didn’t have any bearing of profits, income, have any bearing of profits, income, losses of the assessee and therefore could not be regarded as an losses of the assessee and therefore could not be regarded as an losses of the assessee and therefore could not be regarded as an international transaction and be benchmarked international transaction and be benchmarked under the transfer pricing under the transfer pricing provisions. In this regard, the Ld. AR relied upon the decision rendered by provisions. In this regard, the Ld. AR relied upon the decision rendered by provisions. In this regard, the Ld. AR relied upon the decision rendered by /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. this Tribunal in their own case for AY 2011 this Tribunal in their own case for AY 2011-12. We however note that the 12. We however note that the provisions of Section 92B has been amended by the Finance Act 2012, provisions of Section 92B has been amended by the Finance Act 2012, provisions of Section 92B has been amended by the Finance Act 2012, whereby, in terms of the Explanation to Section 92B, the guarantees/NOC terms of the Explanation to Section 92B, the guarantees/NOC terms of the Explanation to Section 92B, the guarantees/NOC issued by an assessee has been clarified to be in the nature of issued by an assessee has been clarified to be in the nature of issued by an assessee has been clarified to be in the nature of international transaction. We note that the Hon’ble Bombay High Court in international transaction. We note that the Hon’ble Bombay High Court in international transaction. We note that the Hon’ble Bombay High Court in the case of CIT vs. Everest Kanto Cylinders Ltd (378 ITR 57 CIT vs. Everest Kanto Cylinders Ltd (378 ITR 57 CIT vs. Everest Kanto Cylinders Ltd (378 ITR 57) has considered identical issue in light of the provisions of Section 92B and the considered identical issue in light of the provisions of Section 92B and the considered identical issue in light of the provisions of Section 92B and the Explanation, came to a conclusion that the corporate guarantee issued by Explanation, came to a conclusion that the corporate guarantee issued by Explanation, came to a conclusion that the corporate guarantee issued by an entity on behalf of its AE is an international transaction. We further an entity on behalf of its AE is an international transaction. We further an entity on behalf of its AE is an international transaction. We further note that, this identical note that, this identical issue came up before the Hon’ble jurisdictional issue came up before the Hon’ble jurisdictional Madras High Court in the case of Madras High Court in the case of PCIT v. Redington (India) Ltd. (430 PCIT v. Redington (India) Ltd. (430 ITR 298), wherein, the Hon’ble Madras High Court held that, inherent , wherein, the Hon’ble Madras High Court held that, inherent , wherein, the Hon’ble Madras High Court held that, inherent risk cannot be ruled out in providing guarantees and hence the risk cannot be ruled out in providing guarantees and hence the risk cannot be ruled out in providing guarantees and hence the transaction involving issuance of corporate guarantee is covered by the tion involving issuance of corporate guarantee is covered by the tion involving issuance of corporate guarantee is covered by the definition of international transaction consequent to retrospective definition of international transaction consequent to retrospective definition of international transaction consequent to retrospective amendment made by the Finance Act, 2012 and, accordingly adjustments amendment made by the Finance Act, 2012 and, accordingly adjustments amendment made by the Finance Act, 2012 and, accordingly adjustments are required to be made for guarantee commission. The are required to be made for guarantee commission. The relevant findings relevant findings taken note of by us is as taken note of by us is as follows: -

Corporate Guarantee in the nature provided Corporate Guarantee in the nature provided by the assessee therein. The by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and Tribunal held that in case of default, Guarantor has to fulfill the liability and Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that therefore, there is always an inherent risk in providing guarantees and that therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non may be a reason that Finance provider insist on non-charging any com charging any commission from Associated Enterprise as a commercial principle. Further, it has been from Associated Enterprise as a commercial principle. Further, it has been from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always observed that this position indicates that provision of guarantee always observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in involves risk and there is a service provided to the Associate Enterprise in involves risk and there is a service provided to the Associate Enterprise in increasing its creditwo increasing its creditworthiness in obtaining loans in the market, be from rthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P Financial institutions or from others. There may not be immediate charge on P 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. & L account, but inherent risk cannot be ruled out in providing guarantees. & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments mad Ultimately, the Tribunal upheld the adjustments made on guarantee e on guarantee commissions both on the guarantees provided by the Bank directly and also on commissions both on the guarantees provided by the Bank directly and also on commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment the guarantee provided to the erstwhile shareholders for assuring the payment the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise.

4.1 The brief facts are that, the TPO noted that, the assessee has The brief facts are that, the TPO noted that, the assessee has The brief facts are that, the TPO noted that, the assessee has incurred brand promotion/market development expenditure in Indonesia incurred brand promotion/market development expenditure in Indonesia incurred brand promotion/market development expenditure in Indonesia to the tune of Rs.14.99 Crs. According to the TPO, although the assessee to the tune of Rs.14.99 Crs. According to the TPO, although the assessee to the tune of Rs.14.99 Crs. According to the TPO, although the assessee was the brand owner, bu was the brand owner, but the Indonesia AE was a licensed manufacturer t the Indonesia AE was a licensed manufacturer and therefore whatever Advertising & Marketing Expenses (hereinafter in and therefore whatever Advertising & Marketing Expenses (hereinafter in and therefore whatever Advertising & Marketing Expenses (hereinafter in short ‘AMP’) was incurred, ought to have been borne by Indonesia AE and short ‘AMP’) was incurred, ought to have been borne by Indonesia AE and short ‘AMP’) was incurred, ought to have been borne by Indonesia AE and not by the assessee. The TPO accordingly show caused the assessee not by the assessee. The TPO accordingly show caused the assessee not by the assessee. The TPO accordingly show caused the assessee as to why the impugned transaction should not be considered as international why the impugned transaction should not be considered as international why the impugned transaction should not be considered as international transaction and that AMP expenditure incurred on behalf of the AE ought transaction and that AMP expenditure incurred on behalf of the AE ought transaction and that AMP expenditure incurred on behalf of the AE ought to be treated as amount recoverable from the AE at cost along with mark to be treated as amount recoverable from the AE at cost along with mark to be treated as amount recoverable from the AE at cost along with mark up. The TPO is noted to have reje up. The TPO is noted to have rejected the objections of the assessee by cted the objections of the assessee by holding as under:

“8.2.1 A reference of section 92B(1) of the Act may be made at this stage 8.2.1 A reference of section 92B(1) of the Act may be made at this stage 8.2.1 A reference of section 92B(1) of the Act may be made at this stage which defines the international transaction as under: which defines the international transaction as under: "92B, (1) For the purpose of this section and sections 92,92C,92D and "92B, (1) For the purpose of this section and sections 92,92C,92D and "92B, (1) For the purpose of this section and sections 92,92C,92D and 92E "international transaction" means a transaction between two or 92E "international transaction" means a transaction between two or 92E "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non more associated enterprises, either or both of whom are non-residents, residents, in the nature of purchase, sale or lease of tangible or intangible in the nature of purchase, sale or lease of tangible or intangible in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or b property, or provision of services, or lending or borrowing money, or orrowing money, or any other such transaction having a bearing on the profits, income, any other such transaction having a bearing on the profits, income, any other such transaction having a bearing on the profits, income, losses or assets of such enterprise, and shall include a mutual losses or assets of such enterprise, and shall include a mutual losses or assets of such enterprise, and shall include a mutual agreement agreement agreement or or or arrangement arrangement arrangement between between between two two two or or or more more more associated associated associated enterprises for the allocation or apportionment o enterprises for the allocation or apportionment of, or any contribution f, or any contribution to, any cost or expense incurred or to be incurred in connection with a to, any cost or expense incurred or to be incurred in connection with a to, any cost or expense incurred or to be incurred in connection with a /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd.

Apart from this, in the Finance Act, 2012, an explanation to Sec.928 has been Apart from this, in the Finance Act, 2012, an explanation to Sec.928 has been Apart from this, in the Finance Act, 2012, an explanation to Sec.928 has been inserted w.r.e.f. 01.04.2002 which has included the 'use of intangible inserted w.r.e.f. 01.04.2002 which has included the 'use of intangible property' property' under the definition of "International transaction. As for the definition of under the definition of "International transaction. As for the definition of under the definition of "International transaction. As for the definition of intangible property', the explanation also provides an inclusive definition of the intangible property', the explanation also provides an inclusive definition of the intangible property', the explanation also provides an inclusive definition of the expression intangible property [w.r.e.f. 01.04.2002). This includes marketing expression intangible property [w.r.e.f. 01.04.2002). This includes marketing expression intangible property [w.r.e.f. 01.04.2002). This includes marketing related intangible assets, such as, trademarks, trade names, brand names, intangible assets, such as, trademarks, trade names, brand names, intangible assets, such as, trademarks, trade names, brand names, logos; customer related intangible assets, such as, customer lists, customer logos; customer related intangible assets, such as, customer lists, customer logos; customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; human capital related contracts, customer relationship, open purchase orders; human capital related contracts, customer relationship, open purchase orders; human capital related intangible assets, such as, traine intangible assets, such as, trained and organized work force, employment d and organized work force, employment agreements, union contracts; goodwill related intangible assets, such as, agreements, union contracts; goodwill related intangible assets, such as, agreements, union contracts; goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of institutional goodwill, professional practice goodwill, personal goodwill of institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern v professional, celebrity goodwill, general business going concern v professional, celebrity goodwill, general business going concern value; methods, programmes, systems, procedures, campaigns, surveys, studies, methods, programmes, systems, procedures, campaigns, surveys, studies, methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data. forecasts, estimates, customer lists, or technical data.

TVS Motor Company Limited TVS Motor Company Limited PT TVS Indonesia Conceptualize the brand promotion strategy in the Indonesian market. Decide Conceptualize the brand promotion strategy in the Indonesian market. Decide Conceptualize the brand promotion strategy in the Indonesian market. Decide -- the nature of promotional activities to be undertaken the nature of promotional activities to be undertaken - whether to opt for whether to opt for promotional events, roadshows, print promotional events, roadshows, print advertisements or sponsorships. Decide and allocate the budget for brand promotion activities in the Decide and allocate the budget for brand promotion activities in the Decide and allocate the budget for brand promotion activities in the -- Indonesian market. Identify third party vendors in the Indonesian market for availing the brand Identify third party vendors in the Indonesian market for availing the brand Identify third party vendors in the Indonesian market for availing the brand -- promotion services Negotiate the contracts and the pricing arrangements with the vendors and the pricing arrangements with the vendors and the pricing arrangements with the vendors and -- enter into contracts Discussion from time to time on the implementation strategy for brand Discussion from time to time on the implementation strategy for brand Discussion from time to time on the implementation strategy for brand -- promotion activities with the vendor, providing guidance and co promotion activities with the vendor, providing guidance and co-ordination Create marketing and promotional ma Create marketing and promotional materials (flyers/leaflets/ brochures) terials (flyers/leaflets/ brochures) -- through the third party vendors through the third party vendors Monitor the third party vendors in the execution phase of the brand Monitor the third party vendors in the execution phase of the brand Monitor the third party vendors in the execution phase of the brand -- promotion activities Payment to third party vendors for the services received. Payment to third party vendors for the services received. --

8.4 To arrive at the ALP of 8.4 To arrive at the ALP of AMP expenses, it is important to understand that AMP expenses, it is important to understand that whether TVSM India is promoting a brand in Indonesia as a legal owner or it is whether TVSM India is promoting a brand in Indonesia as a legal owner or it is 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 assisting PT TVS Indonesia being licensed manufacturer by way of increase of assisting PT TVS Indonesia being licensed manufacturer by way of increase of sale using TVS brand in Indonesia. As per the argu sale using TVS brand in Indonesia. As per the argument of the assessee that ment of the assessee that PT TVS Indonesia had incurred higher percentage of AMP expenses it means PT TVS Indonesia had incurred higher percentage of AMP expenses it means 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 that the economic ownership of TVS brand in Indonesia vests with AE PT TVS 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 Indonesia. However it may be also possible that the percentage of AMP Indonesia. However it may be also possible that the percentage of AMP expenses incurred by PT TVS Indonesia is less than what the other urred by PT TVS Indonesia is less than what the other urred by PT TVS Indonesia is less than what the other independent licensed manufacturer would have incurred in Indonesia. If so it independent licensed manufacturer would have incurred in Indonesia. If so it independent licensed manufacturer would have incurred in Indonesia. If so it implies that, TVSM India is providing services to develop TVS brand in implies that, TVSM India is providing services to develop TVS brand in implies that, TVSM India is providing services to develop TVS brand in Indonesia. In this circumstances whatever the expendit Indonesia. In this circumstances whatever the expenditure incurred by the ure incurred by the TVSM India in Indonesia should be reimbursed by the AE along with the mark TVSM India in Indonesia should be reimbursed by the AE along with the mark TVSM India in Indonesia should be reimbursed by the AE along with the mark- up.

8.5 However as per statement of the assessee, the percentage of AMP 8.5 However as per statement of the assessee, the percentage of AMP 8.5 However as per statement of the assessee, the percentage of AMP expenses incurred by the other independent parties Indonesia is not available expenses incurred by the other independent parties Indonesia is not available expenses incurred by the other independent parties Indonesia is not available in Public Domain. In this scenario it is more appropriate to consider TVSM Domain. In this scenario it is more appropriate to consider TVSM Domain. In this scenario it is more appropriate to consider TVSM India as a tested party and it has to be ascertained whether TVSM India has India as a tested party and it has to be ascertained whether TVSM India has India as a tested party and it has to be ascertained whether TVSM India has incurred any AMP expenditure in other countries where the spares and vehicles incurred any AMP expenditure in other countries where the spares and vehicles incurred any AMP expenditure in other countries where the spares and vehicles are exported by TVSM India. The searc are exported by TVSM India. The search resulted in that TVSM India has h resulted in that TVSM India has exported vehicles to other countries such as Colombia, Bangladesh, Hong exported vehicles to other countries such as Colombia, Bangladesh, Hong exported vehicles to other countries such as Colombia, Bangladesh, Hong Kong, Japan, Nepal, Singapore and Sri Lanka where TVSM India has not Kong, Japan, Nepal, Singapore and Sri Lanka where TVSM India has not Kong, Japan, Nepal, Singapore and Sri Lanka where TVSM India has not incurred any AMP expenses. It means that due to the presence AE PT TVS incurred any AMP expenses. It means that due to the presence AE PT TVS incurred any AMP expenses. It means that due to the presence AE PT TVS Indonesia, the assessee company incurred huge amount as AMP expenditure the assessee company incurred huge amount as AMP expenditure the assessee company incurred huge amount as AMP expenditure which clearly indicates that TVSM India is a service provider in respect to AMP which clearly indicates that TVSM India is a service provider in respect to AMP which clearly indicates that TVSM India is a service provider in respect to AMP expenses incurred in Indonesia. expenses incurred in Indonesia.

The ALP calculated on the international transaction in respect to brand The ALP calculated on the international transaction in respect to brand The ALP calculated on the international transaction in respect to brand promotion has not been determined by the assessee company in accordance promotion has not been determined by the assessee company in accordance promotion has not been determined by the assessee company in accordance with section 92C (3). Hence the arms length price has been cal with section 92C (3). Hence the arms length price has been calculated as per culated as per the provision of sub-sections (1) and (2) of 92C and determined as Rs. sections (1) and (2) of 92C and determined as Rs. sections (1) and (2) of 92C and determined as Rs. 9,72,301 and Rs. 78,70,058 towards reimbursement of excess AMP and mark 9,72,301 and Rs. 78,70,058 towards reimbursement of excess AMP and mark 9,72,301 and Rs. 78,70,058 towards reimbursement of excess AMP and mark up on Excess AMP. Hence an adjustment to the income of the assessee up on Excess AMP. Hence an adjustment to the income of the assessee up on Excess AMP. Hence an adjustment to the income of the assessee amounting to Rs. 78,70,058 tow amounting to Rs. 78,70,058 towards mark-up on service rendered for brand up on service rendered for brand /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. promotion and Rs. 12,85,95,729 towards reimbursement of expenditure promotion and Rs. 12,85,95,729 towards reimbursement of expenditure promotion and Rs. 12,85,95,729 towards reimbursement of expenditure incurred towards brand promotion are to be made to the income of the incurred towards brand promotion are to be made to the income of the incurred towards brand promotion are to be made to the income of the assessee. The important point is to allocate the expenditure to AE segment, The important point is to allocate the expenditure to AE segment, for this it for this it need not to be a international transaction but it should be related to AE need not to be a international transaction but it should be related to AE need not to be a international transaction but it should be related to AE segment. The assessee has not produced any uncontrolled comparable to show segment. The assessee has not produced any uncontrolled comparable to show segment. The assessee has not produced any uncontrolled comparable to show that this type of brand promotion expenditure is routine in the industry. that this type of brand promotion expenditure is routine in the industry. that this type of brand promotion expenditure is routine in the industry. No independent enterprises would incur huge expenditure on market rprises would incur huge expenditure on market rprises would incur huge expenditure on market promotion and brand promotion in the circumstances that ultimate benefit promotion and brand promotion in the circumstances that ultimate benefit promotion and brand promotion in the circumstances that ultimate benefit goes to AE. Though the assessee is a legal owner of the brand, by incurring goes to AE. Though the assessee is a legal owner of the brand, by incurring goes to AE. Though the assessee is a legal owner of the brand, by incurring such expenditure on the brand, benefit goes to AE PT TVS Ind such expenditure on the brand, benefit goes to AE PT TVS Indonesia. In this onesia. In this whole process the actual advantage is accruing to the AE. Not only the sale is whole process the actual advantage is accruing to the AE. Not only the sale is whole process the actual advantage is accruing to the AE. Not only the sale is going up in Indonesia, due to extraordinary expenditure incurred by the going up in Indonesia, due to extraordinary expenditure incurred by the going up in Indonesia, due to extraordinary expenditure incurred by the assessee on AMP, export cost of goods from TVSM India to the assessee has assessee on AMP, export cost of goods from TVSM India to the assessee has assessee on AMP, export cost of goods from TVSM India to the assessee has gone up which reduces the profitability of the assessee. Therefore, an upward educes the profitability of the assessee. Therefore, an upward educes the profitability of the assessee. Therefore, an upward adjustment is required.” ”

4.3 Assailing the action of the TPO, the Ld. AR submitted that, AMP Assailing the action of the TPO, the Ld. AR submitted that, AMP Assailing the action of the TPO, the Ld. AR submitted that, AMP expenses cannot be regarded as an international transaction under expenses cannot be regarded as an international transaction under expenses cannot be regarded as an international transaction under Chapter X of the Act. In this regard, he relied upon the decisions of the Chapter X of the Act. In this regard, he relied upon the decisions of the Chapter X of the Act. In this regard, he relied upon the decisions of the Hon’ble Delhi High Court in the cases Hon’ble Delhi High Court in the cases of Maruti Suzuki India Ltd (381 ki India Ltd (381 ITR 117), Bosch & Laumb Eye Care India Pvt Ltd vs. Addl. CIT Bosch & Laumb Eye Care India Pvt Ltd vs. Addl. CIT Bosch & Laumb Eye Care India Pvt Ltd vs. Addl. CIT (381 ITR 227) and Honda Siel Power Products Pvt Ltd vs. DCIT Honda Siel Power Products Pvt Ltd vs. DCIT Honda Siel Power Products Pvt Ltd vs. DCIT (237 taxman 304). He also relied upon several decisions of the Tribunal . He also relied upon several decisions of the Tribunal . He also relied upon several decisions of the Tribunal rendered following the foregoing judgments o rendered following the foregoing judgments of Hon’ble Delhi High Court f Hon’ble Delhi High Court (supra). The Ld.AR further submitted that the lower authorities did not (supra). The Ld.AR further submitted that the lower authorities did not (supra). The Ld.AR further submitted that the lower authorities did not correctly appreciate the basic facts and therefore erroneously made the correctly appreciate the basic facts and therefore erroneously made the correctly appreciate the basic facts and therefore erroneously made the impugned adjustment. The Ld. AR explained to us that, in all the AMP impugned adjustment. The Ld. AR explained to us that, in all the AMP impugned adjustment. The Ld. AR explained to us that, in all the AMP /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. cases, impugned by the Revenue, the position taken is that, the global by the Revenue, the position taken is that, the global by the Revenue, the position taken is that, the global foreign headquarter / AE owns the brands and the subsidiary in India was foreign headquarter / AE owns the brands and the subsidiary in India was foreign headquarter / AE owns the brands and the subsidiary in India was incurring marketing expenses and therefore, the Revenue took a view incurring marketing expenses and therefore, the Revenue took a view incurring marketing expenses and therefore, the Revenue took a view that the incurrence of marketing expenses by the Subsidiary that the incurrence of marketing expenses by the Subsidiary that the incurrence of marketing expenses by the Subsidiary created marketing tangibles which enhanced the brand values owned by the marketing tangibles which enhanced the brand values owned by the marketing tangibles which enhanced the brand values owned by the foreign company and therefore the foreign company should reimburse the foreign company and therefore the foreign company should reimburse the foreign company and therefore the foreign company should reimburse the Indian subsidiary for its marketing spend with a mark Indian subsidiary for its marketing spend with a mark-up. Applying the up. Applying the foregoing principle, the Ld. AR submitted foregoing principle, the Ld. AR submitted that, in the present case, the that, in the present case, the assessee was the owner of the brand and its subsidiary was in Indonesia assessee was the owner of the brand and its subsidiary was in Indonesia 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 and therefore, the AMP spends ought to be incurred only by the brand 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 owner, i.e. the assessee and if the subsidiary in Indonesia incurs any AMP 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 , then the foreign AE ought to recover the same with a mark , 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 from the assessee. According to the Ld. AR therefore, the Revenue cannot from the assessee. According to the Ld. AR therefore, the Revenue cannot blow hot and cold by taking completely contrary positions across different blow hot and cold by taking completely contrary positions across different blow hot and cold by taking completely contrary positions across different cases. The Ld. AR accordingly urged that the cases. The Ld. AR accordingly urged that the transfer pricing adjustment transfer pricing adjustment be set aside. He also additionally objected to the methodology of be set aside. He also additionally objected to the methodology of be set aside. He also additionally objected to the methodology of computing the adjustment and his written arguments, which has been computing the adjustment and his written arguments, which has been computing the adjustment and his written arguments, which has been taken on record.

We have heard both the parties and perused the material on record. We have heard both the parties and perused the material on record. We have heard both the parties and perused the material on record. 4.5 It is noted that the assessee had incurred expenditure towards It is noted that the assessee had incurred expenditure towards It is noted that the assessee had incurred expenditure towards advertisement and promotio advertisement and promotion of TVS products in Indonesia. The assessee n of TVS products in Indonesia. The assessee has contended that, it was the economic owner of the brand ‘TVS’ has contended that, it was the economic owner of the brand ‘TVS’ has contended that, it was the economic owner of the brand ‘TVS’ therefore this expenditure was incurred for its own benefit as it enhanced therefore this expenditure was incurred for its own benefit as it enhanced therefore this expenditure was incurred for its own benefit as it enhanced its brand value. Further, the assessee has also directly sold its produ its brand value. Further, the assessee has also directly sold its produ its brand value. Further, the assessee has also directly sold its products in Indonesia, which in assessee’s view, necessitated incurrence of AMP Indonesia, which in assessee’s view, necessitated incurrence of AMP Indonesia, which in assessee’s view, necessitated incurrence of AMP expenses. At the same time, the fact also remains that the AE being the expenses. At the same time, the fact also remains that the AE being the expenses. At the same time, the fact also remains that the AE being the licensed manufacturer was legally entitled to exploit the economic licensed manufacturer was legally entitled to exploit the economic licensed manufacturer was legally entitled to exploit the economic ownership of brand in Indonesia and thus t ownership of brand in Indonesia and thus the risks associated with he risks associated with marketing distribution was required to be borne by it. The Ld. AR however marketing distribution was required to be borne by it. The Ld. AR however marketing distribution was required to be borne by it. The Ld. AR however has averred that, the AE would have incurred marketing expenses as well has averred that, the AE would have incurred marketing expenses as well has averred that, the AE would have incurred marketing expenses as well and that there was nothing brought on record by the TPO that the and that there was nothing brought on record by the TPO that the and that there was nothing brought on record by the TPO that the marketing expenses incurred by the Indonesian AE was less than normal. ncurred by the Indonesian AE was less than normal. ncurred by the Indonesian AE was less than normal.

4.6 Having considered the gamut of facts in light of the prevailing Having considered the gamut of facts in light of the prevailing Having considered the gamut of facts in light of the prevailing jurisprudence, we find that jurisprudence, we find that the facts involved in the present case are the facts involved in the present case are slightly different than the decision of Hon’ble Delhi High Court (supra), slightly different than the decision of Hon’ble Delhi High Court (supra), slightly different than the decision of Hon’ble Delhi High Court (supra), but at the same time, the but at the same time, the ratio decidendi emerging from this decision is of ing from this decision is of relevance to the impugned issue at hand. In the decisions rendered by relevance to the impugned issue at hand. In the decisions rendered by relevance to the impugned issue at hand. In the decisions rendered by Hon’ble Delhi High Court (supra), the Hon’ble Court upheld the assessee’s Hon’ble Delhi High Court (supra), the Hon’ble Court upheld the assessee’s Hon’ble Delhi High Court (supra), the Hon’ble Court upheld the assessee’s plea that the Indian subsidiary had rightly incurred the AMP expenses in plea that the Indian subsidiary had rightly incurred the AMP expenses in 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 ght for the licensed products being marketed in India and that ght for the licensed products being marketed in India and that such AMP expenses could not be said to be recouped from the foreign such AMP expenses could not be said to be recouped from the foreign 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 holding company on the pretext that since the legal ownership of brand holding company on the pretext that since the legal ownership of brand vested with the latter, such AMP expenses benefitted t vested with the latter, such AMP expenses benefitted the foreign holding he foreign holding company by enhancing its brand value. The Hon’ble High Court held that, company by enhancing its brand value. The Hon’ble High Court held that, 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 it was necessary for the Revenue to show existence of some arrangement it was necessary for the Revenue to show existence of some arrangement or understanding between the parties regarding the AMP spends and it or understanding between the parties regarding the AMP spends and it or understanding between the parties regarding the AMP spends and it particularly negated the particularly negated the application of bright line test.

4.8 In light of the above therefore, it cannot be said that the decision of In light of the above therefore, it cannot be said that the decision of In light of the above therefore, it cannot be said that the decision of Hon’ble Delhi High Court (supra) can be squarely applied to the facts Hon’ble Delhi High Court (supra) can be squarely applied to the facts Hon’ble Delhi High Court (supra) can be squarely applied to the facts involved in the present case. However, involved in the present case. However, the benchmarking marking methodology viz., the bright line test adopted he bright line test adopted by the TPO has been specifically rejected by the TPO has been specifically rejected in the case of Sony Ericsson (supra). in the case of Sony Ericsson (supra). Further, the Hon'ble Delhi High he Hon'ble Delhi High Court has held in the case of Maru Court has held in the case of Maruti Suzuki Ltd (supra) that the R ti Suzuki Ltd (supra) that the Revenue needs to establish the existence of international transaction before needs to establish the existence of international transaction before needs to establish the existence of international transaction before /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. undertaking benchmarking of AMP expenses. Hence, ndertaking benchmarking of AMP expenses. Hence, applying this applying this ratio decidendi laid down in these judgments,we agree with the assessee that laid down in these judgments,we agree with the assessee that laid down in these judgments,we agree with the assessee that the approach of the TPO cannot be upheld. the approach of the TPO cannot be upheld. We note that the aforesaid We note that the aforesaid judgments of Hon’ble Delhi High Court (supra) ha judgments of Hon’ble Delhi High Court (supra) had not been considered d not been considered by this Tribunal in assessee’s own case for AY 2011 by this Tribunal in assessee’s own case for AY 2011-12. Hence, having 12. Hence, having regard to the change in legal position on this issue, consequent to these regard to the change in legal position on this issue, consequent to these regard to the change in legal position on this issue, consequent to these judgments (supra), the earlier decision rendered in assessee’s own case judgments (supra), the earlier decision rendered in assessee’s own case judgments (supra), the earlier decision rendered in assessee’s own case for AY 2011-12 is no longer valid. no longer valid.

4.9 Having held so above, at the cost of repetition, it is observed that, Having held so above, at the cost of repetition, it is observed that, Having held so above, at the cost of repetition, it is observed that, even the assessee has not brought on record all the relevant facts even the assessee has not brought on record all the relevant facts even the assessee has not brought on record all the relevant facts concerning the Indonesian AE, the AMP expenses incurred by the latter concerning the Indonesian AE, the AMP expenses incurred by the latter concerning the Indonesian AE, the AMP expenses incurred by the latter and if not, then whether ca and if not, then whether can it be said that the assessee had indeed n it be said that the assessee had indeed incurred expenses on its behalf etc. Also, the nature of AMP expenses incurred expenses on its behalf etc. Also, the nature of AMP expenses incurred expenses on its behalf etc. Also, the nature of AMP expenses incurred by the assessee, reasons for such excessive AMP costs vis incurred by the assessee, reasons for such excessive AMP costs vis incurred by the assessee, reasons for such excessive AMP costs vis-à-vis sales etc. have also not been explained before the TPO. Without these sales etc. have also not been explained before the TPO. Without these sales etc. have also not been explained before the TPO. Without these facts being brought on record, one cannot objectively ascertain and acts being brought on record, one cannot objectively ascertain and acts being brought on record, one cannot objectively ascertain and decide as to whether there exists any arrangement between the parties at decide as to whether there exists any arrangement between the parties at decide as to whether there exists any arrangement between the parties at all or not. For the aforesaid reasons and in fitness of the matters, all or not. For the aforesaid reasons and in fitness of the matters, all or not. For the aforesaid reasons and in fitness of the matters, we set aside the order passed by the AO on AMP aside the order passed by the AO on AMP expenses and restore the same expenses and restore the same to the file of AO/TPO for examining it afresh. to the file of AO/TPO for examining it afresh. The TPO while deciding this The TPO while deciding this issue shall keep in mind the ratio laid down in the decisions of the Hon’ble issue shall keep in mind the ratio laid down in the decisions of the Hon’ble issue shall keep in mind the ratio laid down in the decisions of the Hon’ble /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. :: 15 ::

5.1 Brief facts are that, the TPO noted that the assessee did not earn Brief facts are that, the TPO noted that the assessee did not earn 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 any royalty despite providing use of technical support/brand to its AE in any royalty despite providing use of technical support/brand to its AE in Indonesia. At the same time, he observed that, the assessee company e same time, he observed that, the assessee company e same time, he observed that, the assessee company received Rs.69,03,943/- - as royalty during AY 2010-11 @ 2% of ex 11 @ 2% of ex-factory sale. Therefore, the TPO required the assessee to explain as why transfer sale. Therefore, the TPO required the assessee to explain as why transfer sale. Therefore, the TPO required the assessee to explain as why transfer pricing adjustment in relation to royalty should not be m pricing adjustment in relation to royalty should not be made @ 2% of ex ade @ 2% of ex- factory sale in the relevant AY as well. The assessee is noted to have factory sale in the relevant AY as well. The assessee is noted to have factory sale in the relevant AY as well. The assessee is noted to have replied that, since the AE was incurring losses at gross profit level, the replied that, since the AE was incurring losses at gross profit level, the replied that, since the AE was incurring losses at gross profit level, the assessee had decided not to charge royalty from it. The TPO however did assessee had decided not to charge royalty from it. The TPO however did assessee had decided not to charge royalty from it. The TPO however did not agree to this rationale and held that, royalty is a charge on profits and nale and held that, royalty is a charge on profits and nale and held that, royalty is a charge on profits and is not an appropriation of profits and therefore irrespective whether the is not an appropriation of profits and therefore irrespective whether the is not an appropriation of profits and therefore irrespective whether the AE incurred losses or not, on arm’s length basis, the assessee ought to AE incurred losses or not, on arm’s length basis, the assessee ought to AE incurred losses or not, on arm’s length basis, the assessee ought to have charged the royalty. The TPO accordingly computed have charged the royalty. The TPO accordingly computed upward transfer upward transfer pricing adjustment towards royalty receivable at the rate of 2% at ex pricing adjustment towards royalty receivable at the rate of 2% at ex pricing adjustment towards royalty receivable at the rate of 2% at ex- /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. factory sale at Rs.2,15,56,000/ factory sale at Rs.2,15,56,000/-. This action of the TPO was upheld by . This action of the TPO was upheld by the DRP. Aggrieved by the same, the assessee is in the DRP. Aggrieved by the same, the assessee is in appeal before us. appeal before us.

6.2 Heard both the parties. Heard both the parties. It was brought to our notice that, the It was brought to our notice that, the assessee has own funds of Rs.1121 Crs. as against investments of Rs.930 assessee has own funds of Rs.1121 Crs. as against investments of Rs.930 assessee has own funds of Rs.1121 Crs. as against investments of Rs.930 Crs as on 31.03.2012. In light of the Crs as on 31.03.2012. In light of the aforesaid fact, the assessee claimed the assessee claimed that since its own funds its own funds were much higher than the investment made by much higher than the investment made by it, the question of making disallowance out of interest paid on borrowed the question of making disallowance out of interest paid on borrowed the question of making disallowance out of interest paid on borrowed /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. funds in terms of Rule 8D(2) funds in terms of Rule 8D(2)(ii) did not arise. The Ld. AR brought to our The Ld. AR brought to our notice the decision of the Hon'ble Bombay High Co of the Hon'ble Bombay High Court in the case of urt in the case of HDFC Bank Ltd. v. DCIT (2014) 366 ITR 505 Bank Ltd. v. DCIT (2014) 366 ITR 505 wherein it was wherein it was held that "where assessee's own funds and other non "where assessee's own funds and other non-interest bearing funds were interest bearing funds were more than investment in tax free securities, impugned order passed by more than investment in tax free securities, impugned order passed by more than investment in tax free securities, impugned order passed by the Assessing Officer disallow the Assessing Officer disallowing a part of interest payments ing a part of interest payments under section 14A of the Act ( section 14A of the Act (read with rule 8D(2)(ii) of I.T Rules, 1962 le 8D(2)(ii) of I.T Rules, 1962) needs to be set aside". We note that Hon'ble Bombay High Court in the case of . We note that Hon'ble Bombay High Court in the case of . We note that Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 has laid the proposition of law that e proposition of law that, when there are both interest free funds when there are both interest free funds and interest bearing funds, the presumption is that interest free funds and interest bearing funds, the presumption is that interest free funds and interest bearing funds, the presumption is that interest free funds were utilized for interest free investme were utilized for interest free investment and advances. Thus, we note nt and advances. Thus, we note from the factual matrix discussed supra, that tual matrix discussed supra, that assessee had total own assessee had total own funds more than Rs 1121 1121 crores and the total investment made only to crores and the total investment made only to the tune of Rs. 930 crores, therefore, the presumption in the cases of crores, therefore, the presumption in the cases of crores, therefore, the presumption in the cases of Reliance Utilities & Power Ltd supra is clearly applicable and the Ld. DR Reliance Utilities & Power Ltd supra is clearly applicable and the Ld. DR Reliance Utilities & Power Ltd supra is clearly applicable and the Ld. DR could not demonstrate that this presumption is factually incorrect, ate that this presumption is factually incorrect, ate that this presumption is factually incorrect, therefore, the disallowance made under section 14Aread with llowance made under section 14Aread with llowance made under section 14Aread with Rule 8D(2)(ii) of the Rules, was not warranted 8D(2)(ii) of the Rules, was not warranted and is directed to be deleted. is directed to be deleted.

14.

The next issue is disallowance of export agency commission paid 14. The next issue is disallowance of export agency commission paid 14. The next issue is disallowance of export agency commission paid to non- residents u/s.40(a)(i) of the Act.14.1 The facts of the case are that the residents u/s.40(a)(i) of the Act.14.1 The facts of the case are that the residents u/s.40(a)(i) of the Act.14.1 The facts of the case are that the assessee has incurred a sum assessee has incurred a sum of Rs.33,23,82,167/- towards export agency towards export agency commission. The assessee commission. The assessee has not deducted tax at source. The above ed tax at source. The above payments were made to payments were made to foreign agents for the purpose of promoting the sales foreign agents for the purpose of promoting the sales of the products of the assessee. Hence, the assessee stated that the services of the assessee. Hence, the assessee stated that the services of the assessee. Hence, the assessee stated that the services were rendered by the agents outside India and therefore TDS u/s.195 is not rendered by the agents outside India and therefore TDS u/s.195 is not rendered by the agents outside India and therefore TDS u/s.195 is not applicable. Also these amounts are not taxable as per Article licable. Also these amounts are not taxable as per Article-7Business profits 7Business profits of the DTAA between India and Singapore as the of the DTAA between India and Singapore as the services were rendered from services were rendered from outside India and not from any outside India and not from any permanent establishment in India. According to permanent establishment in India. According to AO, the payments were made fo were made for the assessee’s business purposes, which are r the assessee’s business purposes, which are carried on In India. Hence, the payment, though made to Non In India. Hence, the payment, though made to Non-residents at residents at abroad, is deemed to have arisen in India. AO noted in his assessment abroad, is deemed to have arisen in India. AO noted in his assessment abroad, is deemed to have arisen in India. AO noted in his assessment order that it is the AO and not the assessee or the non that it is the AO and not the assessee or the non-resident to who whom the commission payment is made can decide about the commission payment is made can decide about the applicability of Sec.195(1) applicability of Sec.195(1) or Sec.40(a)(i) of the Act. According to AO, or Sec.40(a)(i) of the Act. According to AO, either the assessee company or either the assessee company or /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd.

Held, dismissing the appeal, that on a reading of section Held, dismissing the appeal, that on a reading of section Held, dismissing the appeal, that on a reading of section 9(1)(vii) ,commission paid by the assessee to the non 9(1)(vii) ,commission paid by the assessee to the non- -resident agents would agents would not come under the term “fees for technical not come under the term “fees for technical services”. For procuring services”. For procuring orders for leather business from orders for leather business from overseas buyers, wholesalers or overseas buyers, wholesalers or retailers, as the case may be, retailers, as the case may be, the non the non-resident agent was paid 2.5per cent. commission on resident agent was paid 2.5per cent. commission on free on boar free on board basis. This was a commissions impliciter. What impliciter. What was the nature of technical service that the non was the nature of technical service that the non resident agents had provided abroad to the assessee was not clear agents had provided abroad to the assessee was not clear agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of the order of the Assessing Officer. The opening of letters of the order of the Assessing Officer. The opening of letters of credit for the purpose of comp credit for the purpose of completing the export obligation was leting the export obligation was an incident of export and, therefore, the non incident of export and, therefore, the non-resident agent resident agent was under was under an obligation to render such services to the an obligation to render such services to the assessee, for which assessee, for which commission was paid. The non- -resident agent did not provide agent did not provide technical services for the purp technical services for the purposes of running of the business of the running of the business of the assessee in India. Therefore, the assessee in India. Therefore, the commission paid to the non commission paid to the non resident agents would not fall agents would not fall within the definition of “fees for within the definition of “fees for technical services” and the technical services” and the assessee was not liable to deduct tax at assessee was not liable to deduct tax at source on payment of source on payment of commission. ssion.

8.1 The brief facts as noted are that, the assessee had capitalized The brief facts as noted are that, the assessee had capitalized The brief facts as noted are that, the assessee had capitalized hedging cost of Rs.4,09,82,305/ hedging cost of Rs.4,09,82,305/- in the books of accounts, but claimed in the books of accounts, but claimed the same as expenditure in the computation of total income. Upon the same as expenditure in the computation of total income. Upon the same as expenditure in the computation of total income. Upon enquiry by the AO, the assessee explained t enquiry by the AO, the assessee explained that it had paid upfront hat it had paid upfront premium on forward contracts forward contracts entered into to mitigate any foreign to mitigate any foreign currency exposure arising out of fluctuation in foreign currency rate currency exposure arising out of fluctuation in foreign currency rate currency exposure arising out of fluctuation in foreign currency rate and that such premium was being amortized and claimed as deduction over that such premium was being amortized and claimed as deduction over that such premium was being amortized and claimed as deduction over the life of the contract the life of the contract. It was explained that, the forward contract It was explained that, the forward contract entered into was in relation to entered into was in relation to repayment of foreign currency loan taken repayment of foreign currency loan taken by way of external commercial borrowings to by way of external commercial borrowings to acquire fixed assets acquire fixed assets. Apart from the foregoing, the exchange loss arising upon repayment of E from the foregoing, the exchange loss arising upon repayment of E from the foregoing, the exchange loss arising upon repayment of ECB loan was also included in the hedging cost. The AO however did not agree loan was also included in the hedging cost. The AO however did not agree loan was also included in the hedging cost. The AO however did not agree with the explanation put forth by the assessee and disallowed the claim with the explanation put forth by the assessee and disallowed the claim with the explanation put forth by the assessee and disallowed the claim by holding as under:

"The contentions of the assessee have been considered and are not "The contentions of the assessee have been considered and are not "The contentions of the assessee have been considered and are not acceptable. The assessee itself had stated that it had capitalized the hedging see itself had stated that it had capitalized the hedging see itself had stated that it had capitalized the hedging cost in the books of account as the same was incurred in relation to acquisition cost in the books of account as the same was incurred in relation to acquisition cost in the books of account as the same was incurred in relation to acquisition of fixed assets. This being so, the assessee cannot change their stand when it of fixed assets. This being so, the assessee cannot change their stand when it of fixed assets. This being so, the assessee cannot change their stand when it comes to claiming of expenditure for i comes to claiming of expenditure for income tax purposes and say that the ncome tax purposes and say that the expenditure was incidental to the business. The treatment of an expenditure as expenditure was incidental to the business. The treatment of an expenditure as 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 capital or revenue depends upon the period for which the enduring benefit was capital or revenue depends upon the period for which the enduring benefit was derived by the assessee. The assessee itself admitted that the derived by the assessee. The assessee itself admitted that the benefit would benefit would be enduring for many years and had capitalized the same in the books. Hence, be enduring for many years and had capitalized the same in the books. Hence, 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. for income tax purposes also, the same has to be treated as capital in nature. for income tax purposes also, the same has to be treated as capital in nature.

8.3 Assailing the action of the lower authorities, the Ld.AR of the Assailing the action of the lower authorities, the Ld.AR of the Assailing the action of the lower authorities, the Ld.AR of the assessee submitted that the assessee submitted that the claim of the forward premium as revenue in premium as revenue in nature was in accordance with prescribed norms, i.e (i) it was in nature was in accordance with prescribed norms, i.e (i) it was in nature was in accordance with prescribed norms, i.e (i) it was in accordance with the Accounting Standards issued by the Institute of accordance with the Accounting Standards issued by the Institute of accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), (AS Chartered Accountants of India (ICAI), (AS-11) in this regard. (ii) it was 11) in this regard. (ii) it was in accordance with the Income Computation and Disclosures Standards accordance with the Income Computation and Disclosures Standards accordance with the Income Computation and Disclosures Standards (ICDS) recommended by the Act for computing income from business and (ICDS) recommended by the Act for computing income from business and (ICDS) recommended by the Act for computing income from business and profession under the Income profession under the Income-tax Act. (iii) was in accordance with various tax Act. (iii) was in accordance with various decisions of the Hon'ble High Courts and the ITA decisions of the Hon'ble High Courts and the ITAT. He further submitted He further submitted that the fluctuation in foreign exchange rates while repaying the foreign the fluctuation in foreign exchange rates while repaying the foreign the fluctuation in foreign exchange rates while repaying the foreign currency loans raised to acquire capital assets, which had already been currency loans raised to acquire capital assets, which had already been currency loans raised to acquire capital assets, which had already been put to use, cannot alter the actual cost of assets in terms of Section 43(1) put to use, cannot alter the actual cost of assets in terms of Section 43(1) put to use, cannot alter the actual cost of assets in terms of Section 43(1) of the Act and that it was allowable as revenue expenditure and that it was allowable as revenue expenditure and that it was allowable as revenue expenditure. Per contra, the Ld. DR for the Revenue supported the action of the lower authorities the Ld. DR for the Revenue supported the action of the lower authorities the Ld. DR for the Revenue supported the action of the lower authorities and argued that premium was paid on account of loan taken for capital premium was paid on account of loan taken for capital premium was paid on account of loan taken for capital purposes and therefore could not be allowed as re purposes and therefore could not be allowed as revenue expenditure. venue expenditure.

13. A bare perusal of the above reveals that AS 13. A bare perusal of the above reveals that AS-11 prescribes how the 11 prescribes how the effects of changes in foreign exchange rate is to be accounted for on effects of changes in foreign exchange rate is to be accounted for on effects of changes in foreign exchange rate is to be accounted for on transactions undertaken in foreign currency or in foreign country. One of s undertaken in foreign currency or in foreign country. One of s undertaken in foreign currency or in foreign country. One of the effects dealt with the standard relates to premium paid on foreign the effects dealt with the standard relates to premium paid on foreign the effects dealt with the standard relates to premium paid on foreign exchange cover. Thus with respect to the issue before us ,undoubtedly it exchange cover. Thus with respect to the issue before us ,undoubtedly it exchange cover. Thus with respect to the issue before us ,undoubtedly it is AS-11 which prescribes the method of accountin 11 which prescribes the method of accounting for the same and it g for the same and it recommends the premium paid on foreign exchange forward contracts recommends the premium paid on foreign exchange forward contracts recommends the premium paid on foreign exchange forward contracts to be amortized as expense or income over the life of the contracts. The to be amortized as expense or income over the life of the contracts. The 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 term expense has been used in juxtaposition with income and its term expense has been used in juxtaposition with income and its meaning has to be derived in co meaning has to be derived in conjunction and consonance with the term njunction and consonance with the term "income", which undoubtedly is revenue receipts. There is no doubt "income", which undoubtedly is revenue receipts. There is no doubt "income", which undoubtedly is revenue receipts. There is no doubt therefore that the recommendation by AS therefore that the recommendation by AS-11 of writing off the premium 11 of writing off the premium on forward exchange contracts as expense means writing it off as on forward exchange contracts as expense means writing it off as on forward exchange contracts as expense means writing it off as revenue expenditure in the profit and loss account. The language of the ture in the profit and loss account. The language of the ture in the profit and loss account. The language of the Accounting Standard is very clear when it recommends amortizing the Accounting Standard is very clear when it recommends amortizing the Accounting Standard is very clear when it recommends amortizing the premium premium premium as as as expense expense expense or or or income. income. income. The The The manner manner manner of of of writing writing writing off off off recommended by the Standard, i.e" expense or income" itself makes it recommended by the Standard, i.e" expense or income" itself makes it recommended by the Standard, i.e" expense or income" itself makes it very clear that it is to be written off in the Profit and Loss account where lear that it is to be written off in the Profit and Loss account where lear that it is to be written off in the Profit and Loss account where all expenses and incomes are recorded. The claim of the assessee all expenses and incomes are recorded. The claim of the assessee all expenses and incomes are recorded. The claim of the assessee therefore clearly is in accordance with AS therefore clearly is in accordance with AS-11 of the ICAI.

Having said so, for allowability of the claim as per AS Having said so, for allowability of the claim as per AS-11, i 11, it is pertinent to see whether there is any bar to the applicability of the same in the to see whether there is any bar to the applicability of the same in the to see whether there is any bar to the applicability of the same in the Act. In other words it is to be seen whether the Act prescribes any Act. In other words it is to be seen whether the Act prescribes any Act. In other words it is to be seen whether the Act prescribes any specific treatment for the said premium which is to be followed if so specific treatment for the said premium which is to be followed if so specific treatment for the said premium which is to be followed if so prescribed and in the absence o prescribed and in the absence of same, the claim is to be allowed as f same, the claim is to be allowed as prescribed by the Accounting Standard. The Hon'ble Apex Court in the prescribed by the Accounting Standard. The Hon'ble Apex Court in the prescribed by the Accounting Standard. The Hon'ble Apex Court in the case of Virtual Soft Systems Ltd. (supra) has laid down the proposition case of Virtual Soft Systems Ltd. (supra) has laid down the proposition case of Virtual Soft Systems Ltd. (supra) has laid down the proposition /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. that where there is no express bar in Act regarding the application of a that where there is no express bar in Act regarding the application of a that where there is no express bar in Act regarding the application of a Accounting Standard prescribed by ICAI, deductions/claims of assesses unting Standard prescribed by ICAI, deductions/claims of assesses unting Standard prescribed by ICAI, deductions/claims of assesses are to be determined on the basis of these accounting standards are to be determined on the basis of these accounting standards are to be determined on the basis of these accounting standards….

The reliance by the Ld.DR/Ld.CIT(A) on the decision of the Bangalore The reliance by the Ld.DR/Ld.CIT(A) on the decision of the Bangalore The reliance by the Ld.DR/Ld.CIT(A) on the decision of the Bangalore Bench of the ITAT in the case of Orchid Ply Industries Ltd. (supra) for Bench of the ITAT in the case of Orchid Ply Industries Ltd. (supra) for Bench of the ITAT in the case of Orchid Ply Industries Ltd. (supra) for the proposition that the loan the proposition that the loan having been taken for meeting capital having been taken for meeting capital obligations ,the premium paid for forward cover also is to be treated as obligations ,the premium paid for forward cover also is to be treated as 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 capital in nature, we find is of no assistance to the assessee since the 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 & Visakhapatnam Bench of the ITAT in the case of Maddi Lakshmaiah & Visakhapatnam Bench of the ITAT in the case of Maddi Lakshmaiah & Co. Ltd. (supra) held that for determining whether devaluation loss is d. (supra) held that for determining whether devaluation loss is d. (supra) held that for determining whether devaluation loss is Revenue or capital, the object for which the currency is obtained is not Revenue or capital, the object for which the currency is obtained is not 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 relevant and what is relevant is the utilization of the amount at the time relevant and what is relevant is the utilization of the amount at the time of devaluation. The ITAT while holding so r of devaluation. The ITAT while holding so referred to and relied on the eferred to and relied on the decision of the Hon'ble apex court in the case of CIT v. Woodword decision of the Hon'ble apex court in the case of CIT v. Woodword 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 Governor India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254/223 CTR 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& 1 and the Hon'ble Bombay High Court in the case of CIT v. V.S. Dempo& 1 and the Hon'ble Bombay High Court in the case of CIT v. V.S. Dempo& Co. (P.) Ltd. [1994] 72 Co. (P.) Ltd. [1994] 72 Taxman 134/206 ITR 291/[1993] 115 CTR 163. Taxman 134/206 ITR 291/[1993] 115 CTR 163.

8.7 The next component of the impugned disallowance is the loss The next component of the impugned disallowance is the loss The next component of the impugned disallowance is the loss arising upon repayment of ECBs which were used for acquiring indigenous arising upon repayment of ECBs which were used for acquiring indigenous arising upon repayment of ECBs which were used for acquiring indigenous fixed assets in India. On perusal of the provisions of Section 43(1) of the On perusal of the provisions of Section 43(1) of the On perusal of the provisions of Section 43(1) of the Act, which defines the term 'actual cost' as the actual cost incurred for Act, which defines the term 'actual cost' as the actual cost incurred for Act, which defines the term 'actual cost' as the actual cost incurred for acquiring the capital asset by the assessee, reduced by that portion of acquiring the capital asset by the assessee, reduced by that portion of acquiring the capital asset by the assessee, reduced by that portion of cost of capital asset that has been met cost of capital asset that has been met directly or indirectly by any other directly or indirectly by any other person or authority. This Section is noted to have several Explanations as person or authority. This Section is noted to have several Explanations as person or authority. This Section is noted to have several Explanations as well. However, on perusal of the same, it is noted that nowhere does this well. However, on perusal of the same, it is noted that nowhere does this well. However, on perusal of the same, it is noted that nowhere does this Section specify that any gain or loss on foreign currency loans acquire Section specify that any gain or loss on foreign currency loans acquire Section specify that any gain or loss on foreign currency loans acquired for the purchase of indigenous assets will have to be reduced or added to for the purchase of indigenous assets will have to be reduced or added to for the purchase of indigenous assets will have to be reduced or added to the cost of assets. We find the decision of the Hon'ble Supreme Court in the cost of assets. We find the decision of the Hon'ble Supreme Court in the cost of assets. We find the decision of the Hon'ble Supreme Court in the case of CIT v. Tata Iron & Steel Co. Ltd. CIT v. Tata Iron & Steel Co. Ltd. (231 ITR 285 231 ITR 285) to be relevant in the facts of the present case relevant in the facts of the present case. In the decided case, it was held . In the decided case, it was held that the cost of an asset and the cost of raising money for purchase of the that the cost of an asset and the cost of raising money for purchase of the that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Once the asset has asset are two different and independent transactions. Once the asset has asset are two different and independent transactions. Once the asset has been acquired, the events subsequent to the acquisition cannot alter the been acquired, the events subsequent to the acquisition cannot alter the been acquired, the events subsequent to the acquisition cannot alter the price paid for it. Therefore, the fluctuation in foreign exchange rates while price paid for it. Therefore, the fluctuation in foreign exchange rates while price paid for it. Therefore, the fluctuation in foreign exchange rates while repaying the foreign currency loans raised to acquire capital assets, which repaying the foreign currency loans raised to acquire capital assets, which repaying the foreign currency loans raised to acquire capital assets, which /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. had already been put to use, cannot alter the actual cost of assets in had already been put to use, cannot alter the actual cost of assets in had already been put to use, cannot alter the actual cost of assets in terms of Section 43(1) of the terms of Section 43(1) of the Act. It is further observe further observed that, similar foreign exchange loss incurred on the same foreign currency loans were foreign exchange loss incurred on the same foreign currency loans were foreign exchange loss incurred on the same foreign currency loans were allowed as deduction by this Tribunal in assessee’s own case for AY 2011 by this Tribunal in assessee’s own case for AY 2011 by this Tribunal in assessee’s own case for AY 2011- 12 by holding as under: 12 by holding as under:-

10.1 On considerat 10.1 On consideration of facts, it is noticed that certain loans ion of facts, it is noticed that certain loans were held in Indian currency in the earlier years. The Assessee were held in Indian currency in the earlier years. The Assessee were held in Indian currency in the earlier years. The Assessee entered into an agreement with the lenders to convert the loans entered into an agreement with the lenders to convert the loans entered into an agreement with the lenders to convert the loans /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. in foreign currency equivalents to take advantage of the lower in foreign currency equivalents to take advantage of the lower in foreign currency equivalents to take advantage of the lower rate of interest r rate of interest rate applicable to later. The assessee has ate applicable to later. The assessee has factually demonstrated that the conversion into foreign factually demonstrated that the conversion into foreign factually demonstrated that the conversion into foreign currency loans have actually benefited the Assessee in terms of currency loans have actually benefited the Assessee in terms of currency loans have actually benefited the Assessee in terms of saving of interest costs. We also notice that there is no dispute saving of interest costs. We also notice that there is no dispute saving of interest costs. We also notice that there is no dispute on the fact that the acquisi on the fact that the acquisition of capital assets / expansion of tion of capital assets / expansion of projects etc. from the term loans taken are already complete projects etc. from the term loans taken are already complete projects etc. from the term loans taken are already complete and the assets so acquired have been put to use. As a and the assets so acquired have been put to use. As a and the assets so acquired have been put to use. As a consequence, the loss occasioned from foreign currency loans consequence, the loss occasioned from foreign currency loans consequence, the loss occasioned from foreign currency loans so converted is a post facto event subsequ so converted is a post facto event subsequent to capital assets ent to capital assets having been put to use. We simultaneously notice that there is having been put to use. We simultaneously notice that there is having been put to use. We simultaneously notice that there is no adverse finding from the Revenue about the correctness or no adverse finding from the Revenue about the correctness or no adverse finding from the Revenue about the correctness or completeness of accounts of assessee on the touchstone of completeness of accounts of assessee on the touchstone of completeness of accounts of assessee on the touchstone of section 145 of the Act. In other words, the profits/ section 145 of the Act. In other words, the profits/gains from gains from the business have been admittedly computed in accordance the business have been admittedly computed in accordance the business have been admittedly computed in accordance with generally accepted accounting practices and guidelines with generally accepted accounting practices and guidelines with generally accepted accounting practices and guidelines notified.

10.2 The assessee has inter alia applied AS 10.2 The assessee has inter alia applied AS-Il dealing with Il dealing with effects of the changes in the exchange rate to record the effects of the changes in the exchange rate to record the effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS incurred owing to fluctuation in the foreign exchange. AS incurred owing to fluctuation in the foreign exchange. AS-11 enjoins reporting of monetary items denominated foreign enjoins reporting of monetary items denominated foreign enjoins reporting of monetary items denominated foreign currency using the closing rate at the end of the accounting currency using the closing rate at the end of the accounting currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising year. It also requires that any difference, loss or gain, arising year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should such conversion of the liability at the closing rate should such conversion of the liability at the closing rate should be recognized in the profit & loss account for the reporting be recognized in the profit & loss account for the reporting be recognized in the profit & loss account for the reporting period. In the same vain, CBDT notification S.O. 892(E) dated 3 period. In the same vain, CBDT notification S.O. 892(E) dated 3 period. In the same vain, CBDT notification S.O. 892(E) dated 3 1-03-2015 referred to also inter alia deals with recognition of 2015 referred to also inter alia deals with recognition of 2015 referred to also inter alia deals with recognition of exchange differences. The notification also sets out that the e differences. The notification also sets out that the e differences. The notification also sets out that the exchange differences arising on foreign currency transactions exchange differences arising on foreign currency transactions exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the have to be recognized as income or business expense in the have to be recognized as income or business expense in the period in which they arise subject to exception as set out in period in which they arise subject to exception as set out in period in which they arise subject to exception as set out in Section 43A or Rul Section 43A or Rule 115 of the Income Tax Rules, 1962 as the e 115 of the Income Tax Rules, 1962 as the case may be.

10.3 The contention of the revenue that the loss is only 10.3 The contention of the revenue that the loss is only 10.3 The contention of the revenue that the loss is only contingent and notional and subsisting has been examined. As contingent and notional and subsisting has been examined. As contingent and notional and subsisting has been examined. As per section 209 of the Companies Act, 1956, the Assessee per section 209 of the Companies Act, 1956, the Assessee per section 209 of the Companies Act, 1956, the Assessee being a company is requir being a company is required to compulsorily follow mercantile ed to compulsorily follow mercantile system of accounting. S. 211 of the Companies Act, 1956 also, system of accounting. S. 211 of the Companies Act, 1956 also, system of accounting. S. 211 of the Companies Act, 1956 also, in terms, mandates that accounting standards as applicable is in terms, mandates that accounting standards as applicable is in terms, mandates that accounting standards as applicable is required to be followed while drawing statement of affairs. S. required to be followed while drawing statement of affairs. S. required to be followed while drawing statement of affairs. S. 145 of the Income Tax Act, 1961 145 of the Income Tax Act, 1961 similarly casts obligation to similarly casts obligation to compute business income either by cash or mercantile system compute business income either by cash or mercantile system compute business income either by cash or mercantile system of accounting. Thus, in view of the various provisions of the of accounting. Thus, in view of the various provisions of the of accounting. Thus, in view of the various provisions of the Companies Act and Income Tax Act, it was mandatory to draw Companies Act and Income Tax Act, it was mandatory to draw Companies Act and Income Tax Act, it was mandatory to draw accounts as per AS II. Thus, in our considere accounts as per AS II. Thus, in our considered view, the loss d view, the loss recognized on account of foreign exchange fluctuation as per recognized on account of foreign exchange fluctuation as per recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting notified accounting standard AS 11 is an accrued and subsisting notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent or a I hypothetical liability. liability and not merely a contingent or a I hypothetical liability. liability and not merely a contingent or a I hypothetical liability. A legal liability also exists against the ass A legal liability also exists against the assessee due to essee due to fluctuation and loss arising there from. Actual payment of loss fluctuation and loss arising there from. Actual payment of loss fluctuation and loss arising there from. Actual payment of loss /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. is an irrelevant consideration to ascertain the point of accrual of is an irrelevant consideration to ascertain the point of accrual of is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in liability. As a corollary, the revenue has committed error in liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent. holding the liability as notional or contingent.

(i) the actual cost of the asset as defined in clause (I) of (i) the actual cost of the asset as defined in clause (I) of (i) the actual cost of the asset as defined in clause (I) of section 43; or section 43; or (ii) the amount of expenditure of a capital nature (ii) the amount of expenditure of a capital nature (ii) the amount of expenditure of a capital nature referred to in clause (iv) of subsection (I) of section 3 referred to in clause (iv) of subsection (I) of section 3 referred to in clause (iv) of subsection (I) of section 35: or (iii) the amount of expenditure of a capital nature (iii) the amount of expenditure of a capital nature (iii) the amount of expenditure of a capital nature referred to in section 35A; or referred to in section 35A; or (iv) the amount of expenditure a/a capital nature (iv) the amount of expenditure a/a capital nature (iv) the amount of expenditure a/a capital nature referred to in clause (ix) of subsection (I) of section 36: referred to in clause (ix) of subsection (I) of section 36: referred to in clause (ix) of subsection (I) of section 36: or (v) the cost of acquisition of a capital asset (not b (v) the cost of acquisition of a capital asset (not b (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes capital asset referred to in section 50) for the purposes capital asset referred to in section 50) for the purposes /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. of section 48, and the amount arrived at after such of section 48, and the amount arrived at after such of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost addition or deduction shall be taken to be the actual cost addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital of the asset or the amount of expenditure of a capital of the asset or the amount of expenditure of a capital nature of as the case may nature of as the case may be, the cost of inquisition of be, the cost of inquisition of the capital asset as aforesaid: the capital asset as aforesaid:

A bare reading of the aforesaid provision of Section 43A, A bare reading of the aforesaid provision of Section 43A, A bare reading of the aforesaid provision of Section 43A, which opens with a non which opens with a non-obstante and overriding clause, obstante and overriding clause, would show that it comes into play only when the assets would show that it comes into play only when the assets would show that it comes into play only when the assets are acquired from a country outside India and does not are acquired from a country outside India and does not are acquired from a country outside India and does not apply to acquisitio apply to acquisition of indigenous assets. Another n of indigenous assets. Another notable feature is that S.43A provides for making notable feature is that S.43A provides for making notable feature is that S.43A provides for making corresponding adjustments to the costs of assets only in corresponding adjustments to the costs of assets only in corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of relation to exchange gains/ losses arising at the time of relation to exchange gains/ losses arising at the time of making payment. It therefore deals with realized making payment. It therefore deals with realized making payment. It therefore deals with realized exchange g exchange gain/ loss. The treatment of unrealized ain/ loss. The treatment of unrealized exchange gain/loss is not covered under the scope of S. exchange gain/loss is not covered under the scope of S. exchange gain/loss is not covered under the scope of S. 43A of the Act. It is thus apparent that special provision 43A of the Act. It is thus apparent that special provision 43A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. of S. 43A has no application to the facts of the case. of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on re Therefore, the issue whether, the loss is on re Therefore, the issue whether, the loss is on revenue account or a capital one is required to be tested in the account or a capital one is required to be tested in the account or a capital one is required to be tested in the light light light of of of generally generally generally accepted accepted accepted accounting accounting accounting principles, principles, principles, pronouncements and guidelines etc. pronouncements and guidelines etc.

10.5 Before We delineate on the allowability of loss based on 10.5 Before We delineate on the allowability of loss based on 10.5 Before We delineate on the allowability of loss based on generally accepted accountancy principles, it generally accepted accountancy principles, it may be pertinent may be pertinent to examine whether the increased liability due to fluctuation to examine whether the increased liability due to fluctuation to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital loss can be added to the carrying costs of corresponding capital loss can be added to the carrying costs of corresponding capital assets with reference to S. 43(1) of the Act. Section 43(1) assets with reference to S. 43(1) of the Act. Section 43(1) assets with reference to S. 43(1) of the Act. Section 43(1) defines the expression ‘actual cost’. As per S. 43( defines the expression ‘actual cost’. As per S. 43(1), actual cost 1), actual cost means actual cost of the assets to the assessee, reduced by means actual cost of the assets to the assessee, reduced by means actual cost of the assets to the assessee, reduced by that portion of the costs as has been met directly or indirectly that portion of the costs as has been met directly or indirectly that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have by any other person or authority. Several Explanations have by any other person or authority. Several Explanations have been appended to S. 43(1). However, the section nowhere been appended to S. 43(1). However, the section nowhere been appended to S. 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired specifies that any gain or loss on foreign currency loan acquired specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or for purchase of indigenous assets will have to be reduced or for purchase of indigenous assets will have to be reduced or added to the costs of the assets. Thus, viewed from this added to the costs of the assets. Thus, viewed from this added to the costs of the assets. Thus, viewed from this perspective also, such increased liability cannot be bracketed perspective also, such increased liability cannot be bracketed perspective also, such increased liability cannot be bracketed /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. with cost of acquisition of capital assets save and except in t of acquisition of capital assets save and except in t of acquisition of capital assets save and except in terms of overruthng provisions of S.43A of the Act. terms of overruthng provisions of S.43A of the Act.

“Coming to the question raised, we find it difficult to “Coming to the question raised, we find it difficult to “Coming to the question raised, we find it difficult to follow how the manner of repayment of loan can affec follow how the manner of repayment of loan can affec follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the cost of the assets acquired by the assessee. What is the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the the actual cost must depend on the amount paid by the the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have assessee to acquire the asset. The amount may have assessee to acquire the asset. The amount may have been borrowed by the assessee but even if the assessee been borrowed by the assessee but even if the assessee been borrowed by the assessee but even if the assessee did not repay the loan it will not al did not repay the loan it will not alter the cost of the ter the cost of the asset. If the borrower defaults in repayment of a part of asset. If the borrower defaults in repayment of a part of asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has the loan, the cost of the asset will not change. What has the loan, the cost of the asset will not change. What has to be home in mind is that the cost of an asset and the to be home in mind is that the cost of an asset and the to be home in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two cost of raising money for purchase of the asset are two cost of raising money for purchase of the asset are two differen different and independent transactions. Even if an asset t and independent transactions. Even if an asset is purchased with non is purchased with non-repayable subsidy received from repayable subsidy received from the Government. the cost of the asset will be the price the Government. the cost of the asset will be the price the Government. the cost of the asset will be the price paid by the assessee for acquiring the asset. In the paid by the assessee for acquiring the asset. In the paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the instant case, the allegation is that at the time of time of repayment of loan, there was a fluctuation in the rate of repayment of loan, there was a fluctuation in the rate of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had foreign exchange as a result of which, the assessee had foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have to repay a much lesser amount than he would have to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor otherwise paid. In our judgment, this is not a factor otherwise paid. In our judgment, this is not a factor which can alter the cost incur which can alter the cost incurred by the assessee for red by the assessee for purchase of the asset. The assessee may have raised the purchase of the asset. The assessee may have raised the purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the funds to purchase the asset by borrowing but what the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That assessee has paid for it, is the price of the asset. That assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the price cannot change by any event subsequent to the price cannot change by any event subsequent to the acquisition o acquisition of the asset. In our judgment, the manner or f the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with mode of repayment of the loan has nothing to do with mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the the cost of an asset acquired by the assessee for the the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were purpose of his business. We hold that the questions were purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals rightly answered by the High Court. The appeals rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs.” dismissed. There will be no order as to costs.”

10.7 The issue is also tested in the light of provision of S. 10.7 The issue is also tested in the light of provision of S. 10.7 The issue is also tested in the light of provision of S. 36(l)(iii) governing ded 36(l)(iii) governing deduction of interest costs on borrowals. As uction of interest costs on borrowals. As stated earlier, manner of utilization of loan amount has nothing stated earlier, manner of utilization of loan amount has nothing stated earlier, manner of utilization of loan amount has nothing to do with allowability of any expenditure in connection with to do with allowability of any expenditure in connection with to do with allowability of any expenditure in connection with loan repayment. Both are independent and distinct transactions loan repayment. Both are independent and distinct transactions loan repayment. Both are independent and distinct transactions in nature. Similar analo in nature. Similar analogy can be drawn from S.36(l)(iii) of the gy can be drawn from S.36(l)(iii) of the Act which also reinforces that utilization of loan for capital Act which also reinforces that utilization of loan for capital Act which also reinforces that utilization of loan for capital account or revenue account purpose has nothing to do with account or revenue account purpose has nothing to do with account or revenue account purpose has nothing to do with allowablity of corresponding interest expenditure. A proviso allowablity of corresponding interest expenditure. A proviso allowablity of corresponding interest expenditure. A proviso inserted thereto by Finance Act, inserted thereto by Finance Act, 2003, also prohibits claim of 2003, also prohibits claim of interest expenditure in revenue account only up to the date on interest expenditure in revenue account only up to the date on interest expenditure in revenue account only up to the date on which capital asset is put to use. Once the capital asset is put to which capital asset is put to use. Once the capital asset is put to which capital asset is put to use. Once the capital asset is put to use, the interest expenditure on money borrowed for acquisition use, the interest expenditure on money borrowed for acquisition use, the interest expenditure on money borrowed for acquisition of capital asset is also treate of capital asset is also treated as revenue expenditure. As also d as revenue expenditure. As also noted, S. 43A specifically and categorically calls for adjustments noted, S. 43A specifically and categorically calls for adjustments noted, S. 43A specifically and categorically calls for adjustments in cost of assets for loss or gain arising out of foreign currency in cost of assets for loss or gain arising out of foreign currency in cost of assets for loss or gain arising out of foreign currency fluctuations in respect of funds borrowed in foreign currency fluctuations in respect of funds borrowed in foreign currency fluctuations in respect of funds borrowed in foreign currency for acquisition of foreig for acquisition of foreign assets. However, the same rationale of n assets. However, the same rationale of a deeming provision of S. 43A cannot be applied to loss or gain a deeming provision of S. 43A cannot be applied to loss or gain a deeming provision of S. 43A cannot be applied to loss or gain arising from foreign currency loss utilized for purchase of arising from foreign currency loss utilized for purchase of arising from foreign currency loss utilized for purchase of indigenous assets. Needless to say, impugned currency indigenous assets. Needless to say, impugned currency indigenous assets. Needless to say, impugned currency fluctuation loss has emanated from fo fluctuation loss has emanated from foreign currency loans. reign currency loans. Besides AS-II, the claim of exchange fluctuation loss as revenue II, the claim of exchange fluctuation loss as revenue II, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid account is also founded on the argument that the aforesaid account is also founded on the argument that the aforesaid action was taken to save interest costs and consequently to action was taken to save interest costs and consequently to action was taken to save interest costs and consequently to augment the profitability or reduce revenue losses augment the profitability or reduce revenue losses of the assessee. The impugned fluctuation loss therefore has a direct assessee. The impugned fluctuation loss therefore has a direct assessee. The impugned fluctuation loss therefore has a direct nexus to the saving in interest costs without bringing any new nexus to the saving in interest costs without bringing any new nexus to the saving in interest costs without bringing any new capital asset into existence. Thus, the business exigencies are capital asset into existence. Thus, the business exigencies are capital asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. T implicit as well explicit in the action of the Assessee. T implicit as well explicit in the action of the Assessee. The argument that the act of conversion has served a hedging argument that the act of conversion has served a hedging argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays mechanism against revenue receipts from export also portrays mechanism against revenue receipts from export also portrays commercial expediency. Thus, We are of the opinion that the commercial expediency. Thus, We are of the opinion that the commercial expediency. Thus, We are of the opinion that the plea of the assessee for claim of expenditure is attributable to plea of the assessee for claim of expenditure is attributable to plea of the assessee for claim of expenditure is attributable to revenue account has considerable merits. count has considerable merits.

10.8 Section 145 of the Income Tax Act deals with method of 10.8 Section 145 of the Income Tax Act deals with method of 10.8 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter accounting and states that business income inter-alia has to be alia has to be computed in accordance with cash or mercantile system of computed in accordance with cash or mercantile system of computed in accordance with cash or mercantile system of accounting. Sub accounting. Sub-section (2) thereof authorizes the Central es the Central Government to notify accounting standards to be followed for Government to notify accounting standards to be followed for Government to notify accounting standards to be followed for determination determination determination of of of business income. business income. business income. Section Section Section 211 211 211 of of of the the the Companies Act also similarly casts a duty on a company to give Companies Act also similarly casts a duty on a company to give 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 a true and fair view of the profit and loss of the company for 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 he financial year. It also requires the company to adhere, the he financial year. It also requires the company to adhere, the accounting standards for preparation of profit in the Profit & accounting standards for preparation of profit in the Profit & accounting standards for preparation of profit in the Profit & Loss Account and the Balance Sheet. A conjoint reading of Loss Account and the Balance Sheet. A conjoint reading of Loss Account and the Balance Sheet. A conjoint reading of section 145 of the Act and section 211 of the Companies Act section 145 of the Act and section 211 of the Companies Act section 145 of the Act and section 211 of the Companies Act leaves no room for doubt that’ the Assessee is obliged to follow om for doubt that’ the Assessee is obliged to follow om for doubt that’ the Assessee is obliged to follow /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. the accounting standards prescribed to determine business the accounting standards prescribed to determine business the accounting standards prescribed to determine business income under the head “business or profession”. We notice that income under the head “business or profession”. We notice that income under the head “business or profession”. We notice that the Hon’ble Supreme Court in the case of Woodward Governor the Hon’ble Supreme Court in the case of Woodward Governor the Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) India (P) Ltd. (supra) has observed that AS-I I is mandatory in I I is mandatory in nature. In the light of observations made in Woodward nature. In the light of observations made in Woodward nature. In the light of observations made in Woodward Governor India (P) Ltd. (supra), we arc of the view that loss Governor India (P) Ltd. (supra), we arc of the view that loss Governor India (P) Ltd. (supra), we arc of the view that loss arising on foreign exchange fluctuation loss has been rightly arising on foreign exchange fluctuation loss has been rightly arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in accounted for as a revenue expense in the Profit & Loss account the Profit & Loss account in accordance with accounting fiat of AS in accordance with accounting fiat of AS-11.

10.9 We find that the decision in the case of Sutlej Cotton Mills 10.9 We find that the decision in the case of Sutlej Cotton Mills 10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. Ltd. Ltd. (supra) (supra) (supra) relied relied relied upon upon upon by by by the the the Ld. Ld. Ld. Departmental Departmental Departmental Representative is of no assistance to the Revenue. The Hon’ble Representative is of no assistance to the Revenue. The Hon’ble Representative is of no assistance to the Revenue. The Hon’ble Supreme Court therein stated the principle of law that where e Court therein stated the principle of law that where e Court therein stated the principle of law that where any profit or loss arises to an assessee on account of any profit or loss arises to an assessee on account of any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from depreciation in foreign currency held by him on conversion from depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading another currency, such profit and loss would ordinary be trading another currency, such profit and loss would ordinary be trading loss if the forei loss if the foreign currency held by the assessee on revenue gn currency held by the assessee on revenue account as trading asset or as a part of circulating capital account as trading asset or as a part of circulating capital account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as embargo in business. However, if the foreign currency is held as embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The a capital asset, the loss should be capital in nature. The a capital asset, the loss should be capital in nature. The aforesaid principle of law aforesaid principle of law is required to be applied to the facts is required to be applied to the facts of case to determine whether the foreign currency is held by of case to determine whether the foreign currency is held by of case to determine whether the foreign currency is held by the assessee on revenue account or as a part of circulating the assessee on revenue account or as a part of circulating the assessee on revenue account or as a part of circulating capital. In the present case, fluctuation loss inflicted upon the capital. In the present case, fluctuation loss inflicted upon the capital. In the present case, fluctuation loss inflicted upon the assessee bears no nexus or rel assessee bears no nexus or relation to the acquisition to the ation to the acquisition to the assets. The action of the assessee is tied up to its underlying assets. The action of the assessee is tied up to its underlying assets. The action of the assessee is tied up to its underlying objective i.e. saving in interest costs, hedging its revenue objective i.e. saving in interest costs, hedging its revenue objective i.e. saving in interest costs, hedging its revenue receipts etc. which are undoubtedly on revenue account. Thus, receipts etc. which are undoubtedly on revenue account. Thus, receipts etc. which are undoubtedly on revenue account. Thus, the loss generated in impugned action the loss generated in impugned action bears the character of bears the character of revenue expenditure. Similarly, decision of the Apex Court in revenue expenditure. Similarly, decision of the Apex Court in revenue expenditure. Similarly, decision of the Apex Court in the case of Tata Iron and Steel co. (supra) also weighs in the case of Tata Iron and Steel co. (supra) also weighs in the case of Tata Iron and Steel co. (supra) also weighs in favour of the assessee. We also note that reliance placed by the favour of the assessee. We also note that reliance placed by the favour of the assessee. We also note that reliance placed by the CIT(A) on Elecon Engineering Co. Ltd. (supra) CIT(A) on Elecon Engineering Co. Ltd. (supra) is misplaced. The is misplaced. The decision concerns applicability of S. 43A in the facts of that case decision concerns applicability of S. 43A in the facts of that case decision concerns applicability of S. 43A in the facts of that case and thus clearly distinguishable. and thus clearly distinguishable.

11.

For the aforesaid reasons, in the absence of applicability of 11. For the aforesaid reasons, in the absence of applicability of 11. For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in the section 43A of the Act to the facts of the case and in the section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing any other provision of the Income Tax Act dealing any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue with the issue, claim of exchange fluctuation loss in revenue with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted account by the Assessee in accordance with generally accepted account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards accounting practices and mandatory accounting standards accounting practices and mandatory accounting standards notified by the ICAI and a notified by the ICAI and also in conformity with CBDT lso in conformity with CBDT notification cannot be faulted. No inconsistency with any notification cannot be faulted. No inconsistency with any notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been provision of Act or with any accounting practices has been provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that brought to our notice. Otherwise also, in the light of fact that brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which the conversion in foreign currency loans which led to impugned led to impugned loss, were dictated by revenue considerations towards saving loss, were dictated by revenue considerations towards saving loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the interest costs etc. we have no hesitation in coming to the interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable conclusion that loss being on revenue account is an allowable conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. The order of the C expenditure under S. 37(1) of the Act. The order of the C expenditure under S. 37(1) of the Act. The order of the CIT(A)

/Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. sustaining the disallowance is not called for and is thus sustaining the disallowance is not called for and is thus sustaining the disallowance is not called for and is thus reversed. In the result, the Ground No.1 is allowed.” In the result, the Ground No.1 is allowed.” In view of the decision of Co In view of the decision of Co-ordinate Bench of Pune Tribunal, this ordinate Bench of Pune Tribunal, this ground raised by the assessee is allowed.” ground raised by the assessee is allowed.” 8.8 It is noted that the lower authorities had made the impugned It is noted that the lower authorities had made the impugned It is noted that the lower authorities had made the impugned disallowance on the limited point that, disallowance on the limited point that, the assessee's entries in the books the assessee's entries in the books of accounts capitalizing the of accounts capitalizing the hedging cost to the cost of assets denoted to the cost of assets denoted that the same was capital in nature. The Ld. AR was capital in nature. The Ld. AR had pointed out to us had pointed out to us that, AS-11 notified by ICAI, as amended in 2003, provided that the 11 notified by ICAI, as amended in 2003, provided that the 11 notified by ICAI, as amended in 2003, provided that the foreign exchange loss arising out of foreign currency fluctuations in foreign exchange loss arising out of foreign currency fluctuations in foreign exchange loss arising out of foreign currency fluctuations in respect of fixed assets acquired out of foreign currency loans was to be respect of fixed assets acquired out of foreign currency loans was to be respect of fixed assets acquired out of foreign currency loans was to be routed through Profit & Loss Account. & Loss Account. However, in the relevant FY 2011 n the relevant FY 2011- 12, the ICAI had modified Para 46A of AS 12, the ICAI had modified Para 46A of AS-11 in December 2011, in terms 11 in December 2011, in terms of which the company now had an option to either debit such foreign of which the company now had an option to either debit such foreign of which the company now had an option to either debit such foreign exchange loss to the Pr exchange loss to the Profit & Loss Account or capitalize the same to e the same to the cost of assets. The assessee, in the present case, chose the latter option. cost of assets. The assessee, in the present case, chose the latter option. cost of assets. The assessee, in the present case, chose the latter option.

10.1 The facts of the case facts of the case are that, the AO noted that the assessee has the AO noted that the assessee has claimed Rs. 5,94,90,540/ 5,94,90,540/- on account of balance additional depreciation on account of balance additional depreciation @ 10% on the assets which were purchased and put to use on the latter @ 10% on the assets which were purchased and put to use on the latter @ 10% on the assets which were purchased and put to use on the latter half of earlier A.Y. 2011 earlier A.Y. 2011-12. The AO noted that the issue relates to the . The AO noted that the issue relates to the allowability of balance additional depreciation in the subsequent ability of balance additional depreciation in the subsequent ability of balance additional depreciation in the subsequent assessment year on the assets which were put to use for less than 180 assessment year on the assets which were put to use for less than 180 assessment year on the assets which were put to use for less than 180 days for the financial year relating to preceding assessment year. days for the financial year relating to preceding assessment year. days for the financial year relating to preceding assessment year. The AO was of the opinion that there was no provision in t was of the opinion that there was no provision in the Act for claiming in he Act for claiming in /Chny/2017 (AY 2012-13) M/s.TVS Motor Co. Ltd. M/s.TVS Motor Co. Ltd. the subsequent financial year the balance 50% of additional depreciation, the subsequent financial year the balance 50% of additional depreciation, the subsequent financial year the balance 50% of additional depreciation, when the assessee had claimed initial 50% of additional depreciation in when the assessee had claimed initial 50% of additional depreciation in 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 the year of purchase of asset as it is used for less than 180 days in terms 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. to section 32(1) of the Act. According to him, such practice is According to him, such practice is not permissible, and the additional depreciation is allowable on plant & not permissible, and the additional depreciation is allowable on plant & not permissible, and the additional depreciation is allowable on plant & machinery which are purchased in the year and put to use in the same machinery which are purchased in the year and put to use in the same machinery which are purchased in the year and put to use in the same year. He therefore disallowed the claim of the as year. He therefore disallowed the claim of the assessee. On appeal, the sessee. On appeal, the DRP confirmed the action of the AO. Aggrieved, the assessee is before us. DRP confirmed the action of the AO. Aggrieved, the assessee is before us. DRP confirmed the action of the AO. Aggrieved, the assessee is before us.

"2. The undisputed facts of this case are that the respondent "2. The undisputed facts of this case are that the respondent "2. The undisputed facts of this case are that the respondent-assessee was an existing industrial undertaking, when it had acquired and n existing industrial undertaking, when it had acquired and n existing industrial undertaking, when it had acquired and installed new plant and machinery in M/s. National Engineering installed new plant and machinery in M/s. National Engineering installed new plant and machinery in M/s. National Engineering Industries Ltd. AY Industries Ltd. AY- 2013-14 the financial year 2006-07 and claimed 50% 07 and claimed 50% of additional 20% depreciation (i.e. 10% additional depreciati of additional 20% depreciation (i.e. 10% additional depreciati of additional 20% depreciation (i.e. 10% additional depreciation) under Section 32(1)(iia) of the Act in the corresponding assessment year Section 32(1)(iia) of the Act in the corresponding assessment year Section 32(1)(iia) of the Act in the corresponding assessment year 2007-08. This was so claimed because admittedly the new machinery 08. This was so claimed because admittedly the new machinery 08. This was so claimed because admittedly the new machinery was acquired after 01.10.2006 and before 31.03.2007, meaning thereby was acquired after 01.10.2006 and before 31.03.2007, meaning thereby was acquired after 01.10.2006 and before 31.03.2007, meaning thereby that it was put to use for the purpose of bu that it was put to use for the purpose of business for a period of less siness for a period of less than 180 days. There is also no dispute with regard to the fact that than 180 days. There is also no dispute with regard to the fact that than 180 days. There is also no dispute with regard to the fact that under Section 32(1)(iia), read with second proviso to 32(1)(ii) of the under Section 32(1)(iia), read with second proviso to 32(1)(ii) of the under Section 32(1)(iia), read with second proviso to 32(1)(ii) of the Act, for the assessment year 2007 Act, for the assessment year 2007-08, the respondent- assessee could assessee could have been, and was have been, and was granted benefit of 50% of the 20% of the amount granted benefit of 50% of the 20% of the amount of depreciation allowable under sub of depreciation allowable under sub-section (ii) of Section 32(1) of the section (ii) of Section 32(1) of the Act.

The aforesaid two conditions, i.e., the undertaking acquiring new 8. The aforesaid two conditions, i.e., the undertaking acquiring new 8. The aforesaid two conditions, i.e., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it plant and machinery should be a new industrial undertaking, or that it plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been done away by substituting should be claimed in one year, have been done away by substituting should be claimed in one year, have been done away by substituting clause (iia) with effect from 01.04.2006. The grant of additional th effect from 01.04.2006. The grant of additional th effect from 01.04.2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the depreciation, under the aforesaid provision, is for the benefit of the depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization, by either assessee and with the purpose of encouraging industrialization, by either assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existin setting up a new industrial unit or by expanding the existin 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 purchase of new plant and machinery, and putting it to use for the 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 purpose of business. The proviso to Clause (ii) of the said Section makes 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 it clear that only 50% of the 20% would be allowable, if the new plant it clear that only 50% of the 20% would be allowable, if the new plant and machinery so acquired is put t and machinery so acquired is put to use for less than 180 days in a o use for less than 180 days in a financial year. However, it nowhere restricts that the balance 10% would financial year. However, it nowhere restricts that the balance 10% would financial year. However, it nowhere restricts that the balance 10% would not be allowed to be claimed by the assessee in the next assessment not be allowed to be claimed by the assessee in the next assessment 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 9. The language used in Clause (iia) of the said Section clearly provides 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 hat "a further sum equal to 20% of the actual cost of such machinery hat "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 or plant shall be allowed as deduction under Clause (ii)". The word 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 "shall" used in the said Clause is very significant. The benefit which is to "shall" used in the said Clause is very significant. The benefit which is to be granted is 20% additional depreciation. be granted is 20% additional depreciation. By virtue of the proviso By virtue of the proviso referred to above, only 10% can be claimed in one year, if plant and referred to above, only 10% can be claimed in one year, if plant and 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. machinery is put to use for less than 180 days in the said financial year. 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 This would necessarily mean that the balance 10% additional deduction This would necessarily mean that the balance 10% additional deduction can be availed in the subsequent assessment year, otherwise the very n the subsequent assessment year, otherwise the very n the subsequent assessment year, otherwise the very purpose of insertion of Clause (iia) would be defeated because it purpose of insertion of Clause (iia) would be defeated because it purpose of insertion of Clause (iia) would be defeated because it provides for 20% deduction which shall be allowed. provides for 20% deduction which shall be allowed.

10.

It has been consistently held by this Court, as well as the Apex 10. It has been consistently held by this Court, as well as the Apex 10. It has been consistently held by this Court, as well as the Apex Court, that benef Court, that beneficial legislation, as in the present case, should be given icial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the liberal interpretation so as to benefit the assessee. In this case, the liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be intention of the legislation is absolutely clear, that the assessee shall be intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was re allowed certain additional benefit, which was restricted by the proviso to stricted by the proviso to only half of the same being granted in one assessment year, if certain only half of the same being granted in one assessment year, if certain only half of the same being granted in one assessment year, if certain condition was not fulfilled. But, that, in our considered view, would not condition was not fulfilled. But, that, in our considered view, would not condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the restrain the assessee from claiming the balance of the benefit in the restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held, essment year. The Tribunal, in our view, has rightly held, essment year. The Tribunal, in our view, has rightly held, that additional depreciation allowed under Section 32(1)(iia) of the Act that additional depreciation allowed under Section 32(1)(iia) of the Act that additional depreciation allowed under Section 32(1)(iia) of the Act is a one time benefit to encourage industrialization, and the provisions is a one time benefit to encourage industrialization, and the provisions is a one time benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, libe related to it have to be construed reasonably, liberally and purposively, rally and purposively, to make the provision meaningful while granting additional allowance. to make the provision meaningful while granting additional allowance. to make the provision meaningful while granting additional allowance. We are in full agreement with such observations made by the Tribunal. We are in full agreement with such observations made by the Tribunal. We are in full agreement with such observations made by the Tribunal.

4.To be noted, at the point in time when the appeal was admitted, vide noted, at the point in time when the appeal was admitted, vide noted, at the point in time when the appeal was admitted, vide order dated 18.04.2016, the following substantial questions of law were order dated 18.04.2016, the following substantial questions of law were 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 i.Whether the Tribunal was right in law in holding that the Commissioner i.Whether the Tribunal was right in law in holding that the Commissioner of Income Tax has rightly invoked juris of Income Tax has rightly invoked jurisdiction under Section 263 of the diction under Section 263 of the Act ? ii.Whether the allowance of additional depreciation by the Assessing ii.Whether the allowance of additional depreciation by the Assessing ii.Whether the allowance of additional depreciation by the Assessing Officer after eliciting replies from the assessee could be revised under Officer after eliciting replies from the assessee could be revised under Officer after eliciting replies from the assessee could be revised under Section 263 of the Act without establishing that the assessment order Section 263 of the Act without establishing that the assessment order Section 263 of the Act without establishing that the assessment order was erroneous and prejudicial to the interest of the Revenue ? and rroneous and prejudicial to the interest of the Revenue ? and rroneous and prejudicial to the interest of the Revenue ? and iii.Whether the Tribunal was right in law in holding that the assessee is iii.Whether the Tribunal was right in law in holding that the assessee is 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 not entitled to claim additional depreciation during the year in respect of not entitled to claim additional depreciation during the year in respect of additions made to fixed assets in the second additions made to fixed assets in the second half of the assessment year the assessment year 2003-04 ?'