ASST CIT 5(2)(1), MUMBAI vs. KEC INTERNATIONAL LTD, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2010-11 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)-56/Trf/2014-15/162-F dated 30/09/2015 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(13) of the IT Act, 1961 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/04/2014 by the ld. Addl. Commissioner of Income Tax, Range-8(2), Mumbai (hereinafter referred to as ld. AO).

3.2. In other words, the assessee had given performance guarantee to Bahwan Engineering Company LLC on behalf of its AE guaranteeing the performance of duties and applications that would be done by its AE and in the event of any such failure of performance by the AE, the assessee would indemnify Bahwan Engineering Company LLC against all liabilities, claims, demands, damages etc., Subsequent to the Deed of Indemnity, the assessee had also entered into agreement dated 28/11/2009 with its AE stating that in the event of indemnity provisions being invoked by Bahwan Engineering Company LLC on failure of performance by the AE, then the entire sub-contract shall be assigned to the assessee substituting them in place of AE as a Sub-Contractor to Bahwan Engineering Company LLC. The assessee while providing such M/s. KEC International Ltd., performance guarantee to BEC did not incur any charges or cost whatsoever and accordingly, no commission was charged by the assessee to its AE for providing the said performance guarantee. 3.3. The ld. TPO sought to treat this performance guarantee as an international transaction and resorted to make adjustment to arm‟s length price (ALP) thereon for which purpose, a show cause notice was issued to the assessee. The assessee responded that in the case of assignment of the contract in the name of the assessee pursuant to failure of the AE to perform its duties and obligations as a sub-contractor to Bahwan Engineering Company LLC, the payments and amount receivable that are due to the AE would come naturally to the assessee company which would be a larger benefit that would be derived by the assessee than charging performance guarantee commission from its AE. It was also submitted that the entire profit on the contract assigned by the Bahwan Engineering Company LLC in favour of the assessee would automatically come to the assessee company and there is absolutely no risk involved for the assessee in this transaction of issuance of performance guarantee to Bahwan Engineering Company LLC on behalf of its AE. Accordingly, the assessee pleaded that it was justified in not charging any commission from its AE for issuing the said performance guarantee.

3.3. The ld. TPO however, did not agree to this contention of the assessee and stated that in case of default committed by the AE in not performing its duties and obligations in the Sub-contract work allotted to AE, then the assessee had to step-in as the entire sub-contract would come to the assessee company and the assessee has to put all resources in place for executing the contract or as to find another sub-contractor to complete the contract. In such circumstances, the assessee company had to take the risk which needs to be compensated to the assessee by its AE. Accordingly, the ld. TPO treated this issuance of performance guarantee M/s. KEC International Ltd., transaction as an international transaction and proceeded to benchmark the same by applying the bank guarantee commission. For this purpose, the ld. TPO adopted the comparable guarantee commissions charged by Allahabad Bank and HSBC Bank to various comparables which are listed out in page 4 of his order and arrived at the mean guarantee commission percentage thereon at 1.04%. The ld. TPO applied the said 1.04% on the outstanding performance guarantee amount of Rs.198,17,46,365/- for a period of 121 days i.e. from 26/11/2009 to 31/03/2010 and made an adjustment to arm‟s length price (ALP) on outstanding performance guarantee in the sum of Rs.69,45,342/-. 3.4. The ld. CIT(A) held that since there is no cost involved to the assessee in issuing performance bank guarantee, the said issuance of performance bank guarantee would be outside the ambit of an international transaction within the meaning of Section 92B(1) of the Act read with its explanation thereof.

4. Aggrieved, the revenue is in appeal before us.

5.1. The ground Nos.1(b) & 2(a) raised by the revenue are with regard to the action of the ld. CIT(A) deleting the adjustment to arm‟s length price in respect of performance bank guarantee issued to Chandian Company for Water & Electricity (CCWE).

6.1. The ld. TPO observed that Bank of India had given guarantee to the AE based upon the credit rating of the assessee. The credit rating in the present case of the assessee is A+ . As against this, guarantee fees charged by the bank for an identical credit arrangement with the AE will depend upon the credit rating of the AE. In this case, the AE being a newly floated entity, the credit rating is very low. The ld TPO observed that as the credit rating of the assessee is better than that of the AE, hence the execution of performance bank guarantee in favour of CCWE on behalf of the AE results in transfer of benefit to the AE by the bank. Accordingly, the same requires to be benchmarked in accordance with Indian transfer pricing regulations. For this purpose, the ld. TPO identified bank guarantees given by Allahabad Bank and HSBC bank with six customers and arrived at the average guarantee commission thereon at 1.04%. The ld. AO made an adjustment to the arm‟s length price in respect of this transaction by applying this average guarantee commission of 1.04% on the outstanding guarantee amount of Rs.6,07,36,972/- and from that reduced the guarantee fee recovered by the assessee from its AE at 0.93%, and made adjustment to the differential sum of Rs.39,354/- (Rs.3,72,276-Rs.3,32,722) to the ALP of the international transaction in respect of performance bank guarantee.

M/s. KEC International Ltd., 6.2. The assessee contended before the ld. CIT(A) that the ld. TPO while considering the rates of guarantee commission charged by the respective banks with regard to the comparable cases, completely ignored the credit ratings of the entities to whom the banks had issued the said guarantees. Accordingly, it was argued that the ld. TPO had erred in arriving at comparable rate for benchmarking the said transaction. The assessee also contended that the adoption of rate of guarantee commission is nothing but application of comparable uncontrolled price (CUP) method. As per Rule 10B(2) of the IT rules, CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. Where it is possible to locate comparable transaction, CUP method is the most direct and reliable way to apply arm‟s length principle. The assessee pleaded that the ld. TPO had ignored the rate of commission of 0.93% which was charged by the Bank of India to the assessee while issuing guarantee to CCWE. In the case of the assessee, this rate could be considered as most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission. Further, it was argued that the rates adopted by the ld. TPO could not be assumed as comparable in the business of any specific information regarding the comparability analysis of the same. It was also submitted that the banks ascertained the rate of guarantee commission based on the creditworthiness of the entity in whose favour the same is issued. The determination of creditworthiness of an entity depends on several factors like profitability ratios, capital structures, economies of scale etc. The ld. TPO had completely ignored the credit ratings of the entities to whom the banks had issued the guarantees vis-a-vis the credit ratings of the assessee while calculating the arm‟s length rate of guarantee commission thereby not taking into account the comparability analysis of the comparable. The M/s. KEC International Ltd., assessee pleaded that the ld. TPO had considered the rate charged by the banker of the third parties as ALP to benchmark the transaction of the assessee with AE. In this case, the internal direct comparable is available which is properly comparable for benchmarking. Hence, the rate charged by the bank at 0.93% is directly comparable in case of issuance of guarantee to CCWE. Further, the assessee had already recovered the said rate of 0.93% charged by Bank of India from its AE. This rate is nothing but the comparable uncontrolled rate of commission in case of transaction of issuance of guarantee. The ld. CIT(A) accepted to the aforesaid contentions of the assessee and stated that 0.93% is the arm‟s length rate of commission in the subject mentioned transaction and hence, no further adjustment need to be made for the same as the said rate of 0.93% had been duly recovered by the assessee from its AE.

8.1. Ground No.2(b) raised by the Revenue is with regard to the action of the ld. CIT(A) in holding that the guarantee commission recovered by the assessee at 0.93% from its AE was at arm‟s length in respect of bank guarantee given to CCWE for releasing the advance payment.

M/s. KEC International Ltd., 9. The brief facts of this issue are that the assessee company had given advance payment guarantee to CCWE on behalf of AE of the assessee for a total amount of Euro 20,06,252/- (INR 12,14,73,944). This guarantee was required by CCWE, who has given contract to the AE, before giving any advance to the AE. In effect, this bank guarantee was issued to CCWE for securing the advance payment from CCWE by the AE. The assessee submitted before the ld. TPO that the bank had charged 0.93% as the guarantee commission and there was no formal guarantee agreement entered in this regard. The assessee stated that the Credit Rating issued by CARE is A+ and Credit Rating of the AE was not done. The assessee pleaded that no benchmarking was done by the assessee as executing guarantee in favour of a bank on behalf of the AE was not an international transaction in the opinion of the assessee. The assessee also stated that the Corporate bond rates for United Arab Emirates (UAE) were not available. However, it contended that rate of interest on borrowings made in the country in which the AE is situated is quite low in comparison with bond rate prevailing in India. Therefore, Indian Corporate Bond rates should not be applied for benchmarking. The assessee also pleaded that the bank had charged the assessee 0.93% for issuing this bank guarantee to CCWE on behalf of its AE for securing the advance payment for executing the contract. The assessee also submitted that this guarantee fee of 0.93% had been duly recovered by it from its AE and hence, there is no impact on profit or loss of the assessee.

9.1. The ld. TPO considered the issuance of said guarantee as a corporate guarantee given by Bank of India to CCWE to enable them to release the advance payment to the AE of the assessee. He observed that in the absence of any credit rating of AE and as the AE is an operating company, the credit rating of AE is taken at “BBB” whereas the assessee credit rating is A+. In an uncontrolled transaction like this between M/s. KEC International Ltd., unrelated parties, guarantee fee would have been charged taking into account creditworthiness of the AE, margins, security or any other consideration relevant for deciding the financial stability of the AE. The ld. TPO observed that the guarantee income would have accrued to the assessee if the said amounts were given to unrelated parties in the similar circumstances as that of its AE‟s. The ld. TPO applied the CUP method for benchmarking this transaction and determined the arm‟s length price thereon as under:-

“(B) Methodology: Application of this method begins by quantifying the benefit received by the guaranteed entity. This accomplished by:  determining the credit rating of the guaranteed entity on a stand-alone basis (without reference to the rest of the multinational company of which it is a part);  determining the, corporate bond yield that corresponds to the credit rating of the guaranteed entity had it been a standalone entity;  determining the corporate bond yield that corresponds to the guarantor's credit rating; and Annualised Average yield (%) Rating Financial Year 2009-10 1-2 2-3 5 years years years AAA 6.81 7.55 8.25 AA+ 7.2 7.98 8.71 AA 7.43 8.21 8.94 AA- 7.77 8.49 9.24 A+ 8.16 8.89 9.62 A 8.63 9.38 10.15 A- 9.46 10.38 11.06 BBB+ 9.77 10.73 11.43 BBB 10.68 11.60 12.28 BBB- 11.86 12.69 13.37 • computing the difference or spread between these two yields. The CUP rate for guarantee fee is arrived at as below. Credit rating of Guarantor (i.e. the taxpayer) „A‟ Yield or interest rate for 2-3 year unsecured bond 8.89 Credit rating of AE (as discussed above) „BBB‟ Yield or interest rate for 5 year unsecured bond 11.60% p.a. Benefit to AE on account of Guarantee given by the taxpayer Particulars CCWE V:0|ifstanding Guarantee Amount in foreign 2006252 Euros currency Outstanding Guarantee Amount in INR 12,14,73,944 No. of days the guarantee is outstanding 215 during (28.8.2009 to The year 31.3.2010) Arms Length Guarantee Fee 2.71% Arms Length Price on the outstanding 1939090 corporate guarantee (INR) Guarantee fee charged @ 0,93% from the AE 6,65,444 Adjustment oh a/c of Corporate guarantee 1273646 9.2. Accordingly, the ld. TPO made adjustment of Rs.12,73,646/- on account of issuance of corporate guarantee.

9.3. The assessee pleaded that the ld. TPO had adopted two different rates for benchmarking the bank guarantees given by the assessee. It may be noted that the two bank guarantees, one is performance bank M/s. KEC International Ltd., guarantee and other is advance payment guarantee were given to CCWE on behalf of AE of the assessee. The bank had charged the assessee the same rate of 0.93% for both the cases as guarantee commission. The assessee pleaded that there is no much difference with regard to the said two guarantees and being identical in nature, the ld. TPO had adopted two different principles to benchmark the said transactions. The ld. CIT(A) observed that advance payment guarantee and also the performance guarantee are identical in nature. Hence, both the guarantees being identical in nature, the arm‟s length rate of commission in case of both the guarantees should be the same. Accordingly, he held that the ALP of guarantee commission should be 0.93% in case of advance payment guarantee also and held that no further adjustment towards that rate would be required.

Corporate Tax Issues:-

M/s. KEC International Ltd., “3(a). Whether on the facts and circumstances of the case, the Ld. C1T(A) was justified in allowing the depreciation of Rs. 65,31,55,991/- which was claimed on the actual cost of assets of the power transmission business acquired by the assessee. 3(b). Whether on the facts and circumstances of the case, the Ld. C1T(A) had failed to appreciate that the transfer of assets to the assessee company was by way of demerger falling within the definition given under section 2(19AA) of the Income Tax Act and, therefore, the written down value of the transferred assets in the hands of the assessee company is the written down value of the said assets prior to the demerger. 3(c). Whether on the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer restricting the depreciation claim of the assessee to Rs. 41.79.82.080/- as against the claim of Rs. 65,31,55,991/- made by the assessee.”

12.1. Ground No. 4 & 5 raised by the revenue are with regard to action of the ld. CIT(A) in allowing the mark to market loss arising of foreign exchange contracts which was outstanding at the end of the year. The revenue has raised the following grounds in this regard:-

4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that the mark to market loss arising on the foreign exchange contracts which were outstanding as at the year end is an accrued loss and not a notional loss.

5. On the facts and in the circumstances of the case, the Ld. C1T(A) erred in holding that the mark to market loss arising on the foreign exchange contracts which were outstanding as at the year end is an accrued loss and is not contingent, unascertained or notional in nature and, hence, no adjustment could be made to the book profit under clause (c) of the Explanation (1) to" section 115JB(2).

12.2. At the outset we find both the parties agreed that this issue is already covered by the decision of this Tribunal in assessee‟s own case in earlier years. We find that the ld. CIT(A) had granted relief to the M/s. KEC International Ltd., assessee by following the earlier orders of this Tribunal by observing as under:- 5.1 The facts of the case and the observations/findings of the A.O. are summarized as under:

1.

2. The court approved scheme under section 391 to 394 of the Companies Act, 1956 did not satisfy the conditions laid down under section 2(19AA) of the Act.

3. Under the court approved Scheme, the shares were issued to the transferor company and not to the shareholders of the transferor company as laid down by section 2(19AA) of the Act.

4. Further the transfer to the Appellant was for a lump sum consideration and no values either market value or book value were ascribed to individual assets.

5. Since the assets were not transferred at book values, the condition for the transfer under a Scheme of Arrangement to qualify as 'demerger' within the meaning of 11 section 2(19AA) of the Act was not satisfied.

6. Clearly, the conditions specified in section 2(19AA) of the Act were not satisfied and therefore, the acquisition of the assets was not pursuant to a demerger.

7. Since the transaction could not be said to be a demerger, Explanation 2A and 2B to section 43(6) of the Act and explanation 7A to section 43(1) of the Act cannot be invoked. 8. the AO had in the assessment order of KEC Infrastructure Limited alleged the said transaction is a transfer by way of slump sale and a completely contrary view cannot be taken in the Appellant's case.

The learned AO failed to explicate as to how the transfer would fall within the meaning of demerger as given under section 2(19AA) of the Act and as how all the condition specified under section 2(19AA) of the Act were satisfied. The Appellant further submits that the AO without assigning any cogent reasons has wrongly concluded that the court approved scheme was a device to reduce the income-tax liability and thereby wrongly invoked Explanation 3 to section 43(1) of the Act. The Appellant humbly submits that the Scheme had undergone detailed scrutiny by the Hon‟ble Mumbai High Court, several Financial Institutions which were principal shareholders of the company, its Bankers, Secured and Unsecured Creditors, the Registrar of Companies and several other governmental and non-governmental agencies. The Hon‟ble High Court and all the above institutions/ offices have granted their permission /accord in the reorganization of business only after considering the object of the Scheme. If the said transaction was merely to reduce income tax liability, the above offices would not have accorded their assent to such Scheme as these parties included several Banks and Government Departments. The Appellant further submits that the main intention of the Scheme was to achieve A further growth and efficiency, and to address the following issues: (a) Achieve greater focus on business operations (b) Unlock the value of investments made / extended to group companies (c) Unlock the value of "core power transmission business" (d) Address the concerns of lenders and other stakeholders by separating core and non -core businesses (e) Unlock the value and potential in surplus real estate by the Company (f) Improve dampening of return ratios (g) Improve important indicators of growth such as Return on capital employed and return on net worth (h) Improve credit rating for core business and chart out growth initiatives through expansion and acquisitions. Further, the restructuring was carried out under a Composite Scheme of Arrangement under provisions of Sections 391 -394 of the Companies Act, 1956. In order to implement the scheme, approvals/ sanction were obtained as under: (a) Board of directors; (b) Shareholders of the Company under a court-convened meeting; (c) Secured creditors of the Company under a court-convened meeting; (d) Unsecured creditors of the Company under a court-convened meeting; (e) Bombay High Court; M/s. KEC International Ltd., (j) Stock exchanges where the shares of the Company are listed; (g)Regulatory bodies such as Registrar of Companies, Regional Director and Official Liquidator (in case of Bespoke Finvest Limited) Since the Court Approved Scheme which has undergone detailed scrutiny by several governmental/non-governmental agencies it cannot be rendered as a colorable device merely on the basis of conjectures and surmises. The Appellant further submits that the issue relating to the above ground has been decided in the favour of the Appellant for Assessment Year 2006- 07 by the Hon'ble Mumbai Tribunal vide order dated 04.06.2010 [2010] 41 SOT 43 (MUM.). A photocopy of the said Order is enclosed in the paper book. The relevant extract of the decision of Mumbai Tribunal is reproduced hereunder:- "27. This brings us to the revenue's appeal which is on two issues, the first being the direction of the ClT(Appeals) to allow depreciation at Rs, 87.76 crores as against depreciation of Rs, 15.98 crores allowed by the Assessing Officer and the second being deletion of disallowances made under the pvoviso to section 40(a) and section 43B by the CIT (Appeals).

M/s. KEC International Ltd., 12.3. Respectfully following the Co-ordinate bench decision of this Tribunal in assessee‟s own case supra, the ground raised in 3(a), 3(b)& 3(c) raised by the revenue are dismissed.

12.4. With regard to addition made towards mark to market loss of foreign exchange contracts outstanding at the end of the year, both the parties before us agreed that this issue is also covered by the decision of this Tribunal in assessee‟s own case in earlier year which was relied upon by the ld. CIT(A) by observing as under:-

6.2 During the course of appellate proceedings, detailed submissions were made as follows: "It is pertinent to note that the said issue relating to the above ground has been decided in the favour of the Appellant by the Hon'ble CIT(A) vide order dated 11.07.12 for Assessment Year 2009-10. Thus, the Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income. The relevant extract of the CIT(A) Order is reproduced hereunder: "Thus, from the ratio of the above cited decision, it is quite clear that loss accruing on mark to market valuation of hedging contract is an accrued loss." Further in this regard, the Appellant humbly submits that the forward contract is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one of the parties, against payment in domestic currency to the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. Thus, in case of a forward contract, assessee enters into a legally binding, enforceable contract for purchase of foreign currency on a future date at the pre-determined rates. The date and the rate of purchase of the foreign currency are decided at the time of entering into contract. The difference between the forward contract and the exchange rate on the date of entering into the contract has to be recognized as income or expenses, which is ascertained and definite, in terms of the contract and cannot be regarded as notional or contingent. It is a debt owed by the Appellant, which accrued on the date of entering into the forward contract itself. The expenditure under the accrual system of M/s. KEC International Ltd., accounting had, thus, crystallized on the date of the contract and therefore the same has been rightly claimed by the Appellant. Reliance in this regard is placed on the decision of Hon'ble Delhi High Court in CIT v/s. Woodward Governor India Pvt. Ltd. (294 ITR 451), which has been subsequently affirmed by the Hon'ble Supreme Court in 312 ITR 254, (a copy of the said decision is enclosed in the compilation of case laws) wherein it has been categorically held that the increase in the liability of the assessee on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year cannot be disallowed by treating the same as notional or contingent, since the loss arising to the assessee due to such increase in the liability, accrues to the assessee in that year itself. The relevant extract of the decision is reproduced hereunder: "The liability arose out of contracts already concluded. The liability already stood accrued the minute the contract was entered into. The mere postponement of the payment to a different date cannot extinguish the liability and render it notional or contingent. Even if the liability was discharged at a future date, it would nevertheless be a liability which was certain and not contingent. The main ingredient of a contingent liability was that it depended upon the happening of a certain event. The change in the value of foreign currency in relation to Indian currency was a fait accompli and not a notional one. Therefore the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year was allowable as a deduction and was not a notional or a contingent liability......The decision of the Supreme Court, in Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428/112 Taxman 61, settled the position. That decision explains that what should be certain is the incurring of the liability and it being estimated with reasonable certainty, even if the exact quantification is not feasible. Even if the liability is discharged at a future date, it will nevertheless be a liability which is certain and not contingent. This approach is consistent with and informed by the accounting practices in the mercantile system, with further guidance from the accounting standards of the ICAl which have received judicial acknowledgement.' From the foregoing decision, it is a settled legal position that any loss arising as on the year-end due to exchange fluctuation of any liability would be regarded as an accrued loss/gain (as against a contingent/notional loss/gain) of that year irrespective of whether the payment for such liability is made in the subsequent financial year. Also, reliance is placed on the following judgements which relying on the decision of Supreme Court in the case of CIT v/s. Woodward Governor India Pvt. Ltd. had held that the loss incurred by the assessee on account of variation of the contract on the last date of the accounting period and before the date of maturity of the forward contract was an allowable deduction, M/s. KEC International Ltd., a. Decision of the Mumbai Special Bench has in the case of DCIT v. Bank of Bahrain & Kuwait (41 SOT290) b. Decision of Delhi Tribunal in the case of Bechtel India (P.) Ltd v/s. CIT [2013] 33 taxmann.com 213 (Delhi - Trib.). c. Decision of the Bangalore Tribunal in the case Quality Engineering & Software Technologies (P) Ltd. v/s DCIT [2014] 52 taxmann.com (Bangalore - Trib.). d. Decision of Supreme Court in the case of Oil & Natural Gas Corpn. Ltd. v/s. CIT[2010]189 TAXMAN292 (SC) "Applying these factors on the facts of that case, it was held that the "loss" suffered by the Assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred.

11. We are of the opinion that the ratio of the said decision, with which we are .in respectful agreement, squarely applies to the facts at-hand and, therefore, the loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1) of the Act." Further, it is submitted that since the Accounting Standards mandatorily requires the Appellant to provide for such MTM losses, such accounting treatment needs to be considered even for the purposes of determining the allowability of deduction for such provision under the Act. In the present case too, the Appellant has been actually providing for such MTM losses in its Books of Account in accordance with the applicable Accounting Standards and accordingly, even for this reason, the deduction would be allowable to the Appellant while computing its taxable income. Thus, the Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income." 6.3 The issue stands covered by the decision of the Hon'ble CIT(A) in Appellant's own case for A.Y. 2009-10. Subsequently, the order of CIT(A) on this issue is also being upheld by the Hon'ble Mumbai Tribunal vide its order for A.Y 2009-10. 6.4 Thus, from the above facts and case of the above ground and from the ratio of the above cited decisions, it is quite clear that loss accruing on mark to market valuation of hedging contract is an accrued loss. In view of the above the aforesaid ground is allowed.

12.5. Respectfully following the Co-ordinate bench decision of this Tribunal in assessee‟s own case supra, the ground raised in 4 & 5 raised by the revenue are dismissed.

6. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in allowing deduction of the provision for doubtful debts of Rs. 4,42.58,139/- and the provision for doubtful advances amounting to Rs. 20,70,818/-.

7. On the facts and in the circumstances of the case, the Ld. C1T(A) erred in holding that no adjustment could be made to the book profit under clause (i) of the Explanation (1) to section 115JB(2) on account of the provision for doubtful debts & advances amounting to Rs.4,63,28,957/-“.

16.1. The note No.1 to the notes of accounts explaining the entire scheme of amalgamation as reproduced in the audited financial statements in page 15 of the paper book is also reproduced hereinbelow for the sake of convenience:- 1 Scheme of Amalgamation: A Scheme of Amalgamation (the Scheme) between RPG Cables 1.1. Limited (RPGCL) and the Company and their respective shareholders under section 391 to 394 of the Companies Act, 1956 was sanctioned by the Hon'ble High Court of Judicature at Bombay on 26tfl February, 2010 and at Karnataka, Banglore on 17* March, 2010. The Scheme, which has become operative from 31st March, 2010 upon filing of the certified copies of the Orders of the Hon'ble High Courts with the Registrar of Companies M/s. KEC International Ltd., in the respective States, is effective from 1st March, 2010 (The Appointed date). Pursuant to the Scheme, with effect from the Appointed date 1.2. RPGCL (Transferor Company) is amalgamated in the Company, as a going concern, with all its assets, liabilities, properties, rights, benefits and interest therein subject to existing charges thereon in favour of banks and financial institutions. In consideration for the amalgamation, for every 20 fully paid-up 1.3. equity shares of Rs. 10 each of RPGCL, 1 fully paid-up equity share aggregating 20,73,068 fully paid-up equity shares of Rs. 10 each of the Company have been issued and allotted on 26th April, 2010, to the shareholders of RPGCL whose names appeared in the Register of Members, as on 19th April, 2010, being the record date. All the staff, workmen and employees of RPGCL in service as on 1st 1.4. March, 2010 have become staff, workmen and employees of the Company without any break in their service. In terms of the Scheme, the Company recorded all the assets and 1.5. liabilities appearing in the books of account of RPGCL and transferred to and vested in the Company at their fair values as on 1st March, 2010. For this purpose the fair value of Fixed Assets is as certified by the independent valuers and for other assets including investments is based on the management's assessment of its recoverability. The difference of Rs. 8,497.87 lacs between the fair value of net assets of RPGCL transferred to the Company, and the value of equity shares allotted by the Company as per paragraph 1.3 above has been credited to 'Capital Reserve'. The amalgamation has been accounted for under the Purchase 1.6. method as prescribed in Accounting Standard (AS- 14)-" Accounting for Amalgamations". 16.2. We find from the revised statement of computation of total income filed before the ld. AO which has been taken due cognizance by the ld. AO while framing the assessment, under the caption of „provision for doubtful debts‟ that the assessee had reflected the figure as „nil‟. This itself again goes to prove that there was no debit to the profit and loss account in the sum of Rs. 4,63,28,957/- as alleged by the ld. AO while making the disallowance. We find from page 31 of the paper book that assessee had reduced the following sums from the net profit as per profit and loss account for the purpose of determining the profits and accounts of the business.

M/s. KEC International Ltd., (i) Bad debts written off out of provision for Doubtful debts Rs. 11,26,55,000/- (ii) Provision for doubtful debts written back (since the provision was not allowed as Deduction in earlier year while creating The provision) Rs.7,72,21,516/- 16.3. We also find that the said computation of total income was duly supported by detailed notes which were also filed before the ld. AO, which is not in dispute before us. The relevant note No.4 in respect of provision for doubtful debts and advances is as under:-

M/s. KEC International Ltd., Based on above observation of the Supreme Court the amount written off and also reduced from the Debtors and Loans account in the Balance sheet are allowable deduction in computing income for the year. 4.a) Computation of Book Profit for the purpose of Section 115 JB . In view of r the explanation inserted in section 36 (1) (vii) the assessee are now required to debit the profit and loss account but also simultaneously required to reduce the loans and advances or debtors from the assets side of the balance sheet to the extent of corresponding amount so that at the end of the year advances/ debtors from the assets side of the Balance sheet shown net of the provision for the impugned bad debt/ advance. The above requirement is satisfied in respect of Rs. 4,63,28,957 written off by us during the year. In the light of the Supreme court decision in the case of Vijaya Bank ( 323 ITR 166) the amount written off being ascertain liability allowed in normal computation of income. Therefore in computing the book profit of the year as per provisions of Section 115 JB said amount Rs. 4,63,28,957 not added to the book Profit. 4.b) Deduction of Provision for Doubtful Debt written back In computing the Book Profit u/s 115 JB in the Chartered Accountant Certificate in Form No.29B a deduction of an amount of Rs 18,98,76,516 allowed. However same are not consider by the company as deduction in computing the book profit as per the Revised return of income submitted herewith. The book profit as per Return and CA certificate defer to that extent.

16.4. We find that this note No.4(a) had created all the confusion which is not in consonance with the profit and loss account of the assessee (audited financial statements) and the revised computation of total income of the assessee. However, the note No.4(b) is relevant for the computation of total income which has already been discussed hereinabove, which in any case is not in dispute before us. We find that the ld. CIT(A) had categorically observed from the ledgers of provision for doubtful debts and advances that there was absolutely no debit to the P & L account in the sum of Rs.4,63,28,957/- warranting any disallowance thereof. This finding of the ld. CIT(A) has not been controverted by the ld. DR before us. Hence, we do not find any infirmity in the order of CIT(A) granting relief to the assessee in this regard. Accordingly, the ground No.6 & 7 raised by the revenue are dismissed.

M/s. KEC International Ltd., 17. In the result, appeal of the Revenue is partly allowed.