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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI R.S. SYAL & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Deputy Commission of Income-tax, Circle 6 (1), New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 29.12.2014, passed by the AO under section 143(3)/144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 in consonance with the orders passed by the ld. DRP/TPO on the grounds inter alia that :-
“On the facts and in the circumstances of the case and in law the Hon’ble DRP has erred in directing the AO delete the disallowance amounting to Rs.3,96,37,875/- terming it as an accounting entry linked to the creditors for fixed assets by ignoring the fact that the assessee has got acquired the asset in question and Section 43A of the Income-tax Act, 1961 is applicable only when an assessee has acquired an asset.”
Briefly stated facts of this case are : the assessee company is wholly owned subsidiary of Ciena Corporation of USA and is engaged in providing software development and marketing software services to its overseas group company. The assessee being incorporated on June 27, 2005 is a 100% export oriented unit under Software Technology Park Scheme and commenced its operation from April 10, 2006. In return, for its services i.e. contractual software development and market software services, the assessee company is remunerated on cost plus basis. The role of the assessee is to exclude the work sub-contract by its AE which essentially includes development of software.
Apart from addition of Rs.57,85,92,473/- on account of ALP, the AO made addition of Rs.7,13,33,358/- by noticing in the computation of income that the assessee has deducted Rs.7,13,33,358/- on account of payment relating to fixed assets and as such capitalized as per section 43A of the Act. AO observed that from the perusal of the chart of fixed asset and depreciation, since no such addition has been made by the assessee, the amount cannot be capitalized as per section 43A of the Act.
However, the assessee carried the matter before the ld.DRP by raising objections which have been allowed and addition of Rs.7,13,33,358/- has been deleted. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
Assessee claimed deduction of Rs.7,13,33,358/- in the computation of income on account of payments relating to fixed assets and as such capitalized in accordance with section 43A of the Act. However, AO came to the conclusion that since no such addition has been made by the assessee, the amount of Rs.7,13,33,358/- cannot be capitalized and made the addition thereof in the capital account of the assessee in his draft order.
Ld. AR for the assessee while referring to the detailed calculation of the foreign exchange gain to the tune of Rs.2,78,86,957/- credited to the profit & loss account provided the detail thereof in tabulated form to the ld. DRP which is reproduced for ready perusal as under :-
S.No. Particulars Amount (in Nature of INR) expense 1 Payment – purchase of fixed 3,16,95,482 Capital in assets nature and therefore 2 Reinstatement of closing 3,96,37,875 reduced in balance of creditors for fixed assets the tax computation Total (A) 7,13,33,357 3 Receipt – export of services (1,67,79,355) 4 Reinstatement of closing Bank (1,88,55,960) balance 5 Reinstatement of closing 1,50,10,630) balance of Debtors Revenue in 6 Reinstatement of closing 88,24,829 nature balance of Creditors (other than fixed assets) 7 Bank Transfers (15,58,728) 8 Payment – others (64,457) Total (B) (4,34,44,301) Net exchange gain booked in Profit 2,78,89,056 and loss account (A+B)
Undisputedly, the taxpayer earned foreign exchange gain to the tune of Rs.7,13,33,357/- on the liabilities qua the purchase of fixed assets out of which Rs.3,16,95,482/- was released on payment of liabilities qua purchase of fixed assets which was reduced from the written down value of the fixed assets in accordance with the provisions contained u/s 43A of the Act. In these circumstances, the balance amount of exchange gain of Rs.3,96,37,875/- as referred to at Sl.No.2 of the aforesaid table was booked on account of reinstatement of liabilities pertaining to the purchase of fixed assets and being capital in nature thus reduced while calculating the taxable income. Since the effect of foreign exchange difference u/s 43A of Rs.3,16,95,482/- has been considered by reducing the value of the fixed assets viz. computer lab and others which is in accordance with section 43A of the Act and the ld. DRP has rightly calculated that the disallowance to the extent of Rs.3,16,95,482/- is not sustainable.
Ld. DRP also observed as to the second component of the proposed addition of Rs.7,13,33,357/- that the said amount of Rs.3,96,37,875/- pertains to the reinstatement of closing balance of creditors for fixed assets, which represent only the notional entry and that too in connection with loan for purchase of plant and machinery which is on capital account.
Since the amount of Rs.3,96,37,875/- is a notional sum and if an accounting entry linked to the creditor for fixed assets, it cannot partake the character of income in the hands of taxpayers. So, it being a running account of fixed assets payment has been reduced as
per notional entries. Even otherwise, assessee paid tax on book profit on MAT basis and it will not affect the taxability of the assessee in any manner. Rather it will only affect the fixed assets on account of foreign exchange gain. So, when the foreign exchange gain will not reduce the cost of fixed assets, it is not an income in the hands of the assessee. So, in these circumstances, we find no illegality or perversity in the findings returned by the ld. DRP deleting the addition in question. So, ground taken in the present appeal is determined against the Revenue.
In view of what has been discussed above, the present appeal filed by the Revenue is dismissed.
Order pronounced in open court on this 22nd day of March, 2017.