DCIT, NEW DELHI vs. M/S. SWAROSKI INDIA PVT. LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER

ITA No.5621/Del/2014 Assessment Year : 2004-05

Swarovski India Private Limited, Vs. ACIT, 1A-1D, Vandhana Building, Circle-7(1), 11, Tolstoy Marg, New Delhi. New Delhi. PAN: AABCS4767J ITA No.5496/Del/2014 Assessment Year : 2004-05 DCIT, Vs. Swarovski India Private Circle-7(1), Limited, New Delhi. 1A-1D, Vandhana Building, 11, Tolstoy Marg, New Delhi. PAN: AABCS4767J (Appellant) (Respondent)

Assessee By : Shri Manoj Pardasani, Shri S.K. Agarwal, CA Department By : Shri Amrendra Kumar, CIT, DR Shri Neeraj Kumar, Sr. DR

ITA Nos.5621 &5496/Del/2014

Date of Hearing : 08.02.2017 Date of Pronouncement : 10.02.2017

ORDER PER R.S. SYAL, AM: These two cross appeals – one by the assessee and the other by the

Revenue – arise out of the order passed by the CIT(A) on 26.07.2014 in

relation to the assessment year 2004-05. There are two transfer pricing

additions which have been challenged by the assessee in its appeal apart

from the confirmation of certain non-transfer pricing additions. The

Revenue is also aggrieved against the deletion of one non-transfer

pricing addition.

I. TRANSFER PRICING ADDITIONS

A. TP addition on Import of crystal and crystal components

account of transfer pricing adjustment in respect of ‘Import of crystal

and crystal components’. Briefly stated, the facts of the case are that the

assessee company, with its original name of Swaropearl, was

incorporated in India in 1996. It is a part of Swarovski group, a globally 2

ITA Nos.5621 &5496/Del/2014

famous brand for crystal and crystal related products. It is a world-wide

market leader in crystal jewellery and accessories, grinding and dressing

tools, precision optical equipment and synthetic gemstones. The group

has production locations in twelve countries and has sale companies in

several countries in Asia, Europe, South America, USA and Canada.

The assessee company was initially registered as a 100% export oriented

unit for undertaking activities of coating of raw beads, polishing and

knotting of crystals etc. Later on, the assessee also started imports and

sale of Crystal goods and Crystal components. Apart from 100% EOU

division in Pune, the assessee carries out its trading activities from a

domestic unit in New Delhi which has further two sub-divisions,

namely, Consumer Goods Division (CGD) and a Crystal Components

Division (CCD). Major customers of CGD and CCD are designers and

garment manufacturers etc. The assessee reported certain international

transactions in Form no. 3CEB. The Assessing Officer (AO) referred

the matter of determination of their arm’s length price (ALP) to the

Transfer Pricing Officer (TPO). Reported international transactions

include a transaction of ‘Import of crystal and crystal components’ with 3

ITA Nos.5621 &5496/Del/2014

transacted value of Rs.6,64,22,297/-. Only this international transaction

is under dispute. The assessee applied Comparable Uncontrolled Price

(CUP) method to demonstrate that the international transaction was at

ALP. In order to fortify the adoption of CUP as the most appropriate

method, the assessee argued that the imports were made as per the price

list provided by its AE which was available for all its sales to group

companies (internal comparable). It was also submitted that its AE also

made direct sales of Crystal components to Indian customers and the

amount charged from such independent customers was higher than that

charged from the assessee (external comparable). The assessee

submitted that it was also taking orders on behalf of its AE from

customers in India and forwarding the same for execution to its AE, on

which commission @15% of invoice value was being allowed to it. The

sum and substance of the assessee’s submissions before the TPO was

that the price charged by its AE from any other country through its

group company/branch office was the same as that charged from

customers in India. The TPO observed that the assessee made imports

from its AE and resold the same to Indian customers. He further noticed 4

ITA Nos.5621 &5496/Del/2014

that as against the turnover of Rs.14.86 crore under this segment, the

assessee had shown to have incurred a net loss of Rs.5.11 crore. The

TPO refused to accept the CUP as the most appropriate method on the

ground that the items imported by the assessee were not imported by the

third parties and that was the reason for which the comparables chosen

by the assessee did not correctly reflect ALP of the import transaction

undertaken by it. He, thus, refused to accept the CUP as a reliable

method for benchmarking of this international transaction. It was further

noticed that Customs duty rate for the assessee was in the range of 50%

and it was 0% in the case of third party transactions undertaken by the

AE with customers in India as such parties were using imports for

further exports. That was also considered as a reason for the assessee

pressing hard to import at lower prices from its AE vis-à-vis the price

charged from unrelated parties in India. After rejecting the CUP as the

most appropriate method, the TPO took recourse to the Transactional

Net Margin Method (TNMM), which we will discuss infra in detail.

That is how, he proposed a transfer pricing adjustment of Rs.4.72 crore.

The AO made such an addition. In the first appeal, the ld. CIT(A) 5

ITA Nos.5621 &5496/Del/2014

accepted the application of the TNMM as the most appropriate method

as against the main contention of the assessee for the application of the

CUP method or the Resale Price method (RPM) in alternative. He,

however, accepted the contention of the assessee that the TPO should

not have taken data of comparables for several years for calculating the

ALP. Accordingly, it was directed that only the current year’s data

should be used. In this manner, the issue of transfer pricing adjustment

was restored. Aggrieved thereby, the assessee is in appeal before us

against the adverse findings returned by the ld. CIT(A).

material on record. Only the international transaction of `Import of

crystal and crystal components’ out of the reported transactions is in

dispute inasmuch as all other international transactions reported by the

assessee have been accepted at ALP. The first quarrel is on the selection

of method as the most appropriate method. Whereas, the assessee

applied CUP as the most appropriate method to show that the transaction

was at ALP, the TPO discarded the same and opted for the TNMM.

ITA Nos.5621 &5496/Del/2014

Whether CUP is the most appropriate method ?

4.1. Before considering the question of CUP being a most appropriate

method, let us understand the precise nature of the international

transaction. This import transaction comprises of two things, namely,

Crystal goods and Crystal components for which there are separate

divisions, namely, CGD and CCD. Import of both the Crystal goods and

Crystal components has been shown as one international transaction and

there is no further segregation. The assessee’s Transfer pricing study

report has been placed at pages B-375 onwards of the paper book. Page

B-395 clarifies that the domestic unit of the assessee trades in two types

of goods, one is Crystal components and the other is Crystal goods.

Crystal goods include Silver Crystal, Jewellery, Crystal Decor products.

On the other hand, Crystal components are crystal loose stones which

are sold by the assessee to various manufacturers and dealers etc. for

using as an adornment in their final products. For example, garment

manufacturers use crystal stones as buttons, trimmings etc. Crystal

stones are classified and priced according to their size, colour and

ITA Nos.5621 &5496/Del/2014

method of application on to the garments. To cite an example,

2012SS16 Crystal MHF means that article No.2012 is of size SS16

which corresponds to a diameter of 3.80-4.00 mm. The assessee sells

Crystal goods through dealers and Crystal components are sold either

directly to manufacturers or dealers or to wholesalers. In order to

appreciate the applicability of the CUP method, it is apt to note that Rule

10B (1)(a), which contains the modus operandi for its application, as

under :-

`(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction ;’

4.2. Sub-clause (i) of Rule 10B(1)(a) provides for, inter alia,

identifying the price paid for property purchased. Sub-clause (ii) talks

of making adjustments to such price on account of differences, if any,

between international transaction and comparable uncontrolled

ITA Nos.5621 &5496/Del/2014

transactions, which could materially affect the price in the open market.

Sub-clause (iii) provides that the adjusted price arrived at under sub-

clause (ii) is considered as ALP in respect of the property purchased.

Usually the CUP is the method of first choice because it seeks to directly

compare the price paid for goods with the price paid in a comparable

uncontrolled transaction. Comparison of price paid for goods purchased

in contradistinction to the profit rate in other methods - gross or

operating - offers best comparison as sometimes profit may be

influenced by certain other extraneous factors thereby reducing the

reliability of comparability. However, in order to successfully apply this

method, it is sine qua non that the goods purchased or sold must be

compared with similar goods. Thus, the fundamental thing is that the

goods in an international transaction must be similar to those in

comparable uncontrolled transaction if a valid comparison is to be made.

Of course, some adjustments can be made for bringing a similar product

to the rank of an identical product, which is subject matter of the

consideration. If goods in the international transaction do not exactly

match with the goods in comparable uncontrolled transactions, then this 9

ITA Nos.5621 &5496/Del/2014

method loses its charm and becomes inapplicable as it cannot properly

reflect the ALP of the goods purchased by the assessee from its AE. It is

vivid that an apple can be compared with an apple alone and not an

orange. Some difference in the quality of apples in the international

transaction and comparable uncontrolled transaction can be adjusted

under sub-clause (ii), but in no case an apple in an international

transaction can be compared with an orange, both of which are

materially different from each other.

4.3. Adverting to the facts of the instant case, we find that the assessee

imported Crystal goods as well as Crystal components from its AE.

Apart from mentioning that CUP was the most appropriate method, the

assessee did not identify any comparable in its Transfer pricing study

report. However, during the course of assessment proceedings, the

assessee, vide its letter dated 24.11.2006, a copy placed at page B-320

of the paper book, submitted a company ‘Angel Overseas’ as

comparable by producing a copy of invoice with date. Admittedly, the

so-called comparable uncontrolled transaction is only of Crystal

ITA Nos.5621 &5496/Del/2014

components. Then, on page no. B-324 of the paper book, the assessee

also set out certain comparables which, again, refer only to Crystal

components and not to Crystal goods. The ld. AR candidly admitted that

all the comparables given by the assessee during the course of TP

proceedings were only of Crystal components and none related to

Crystal goods. As a matter of fact, it is an admitted position that the AE

did not sell any Crystal goods to its customers in India directly and only

Crystal components were sold in India by the AE, which are further not

meant for domestic consumption, but, to be utilized for export by such

parties. The international transaction reported by the assessee is a

common pool of both the Crystal goods and Crystal components,

without there being any separate identification for each of them. We

have noticed above that Crystal goods and Crystal components are

different in terms of utility and value etc. and it is evident that the range

of comparables is restricted to Crystal components alone. In view of the

fact that the assessee did not report any comparable uncontrolled

transaction of Crystal goods, we fail to appreciate as to how such rates

charged in transactions of Crystal components can be considered as a 11

ITA Nos.5621 &5496/Del/2014

benchmark for Crystal goods as well. In such circumstances,

applicability of CUP to a single combined international transaction of

Import of Crystal goods and Crystal components, cannot be considered

as the most appropriate method.

4.4. However, the other view point of the TPO, as accentuated by the

ld. DR, that the unrelated parties made purchases of Crystal components

for export and hence no customs duty was payable went on to prove that

the assessee’s purchases were not at ALP because it bargained more,

does not prove the case. In our considered opinion, the relevant factor is

the price charged by the AE from the assessee and unrelated parties.

Such price is charged w.r.t the costs incurred and the profit that it

intends to earn. How the buyer is going to use the products purchased

from the AE is not determinative of the price which the AE is going to

charge from the sales made by it. Be that as it may, the contention of the

Revenue, if accepted, would rather support the case of the assessee. If

the assessee is bargaining hard and making cheap purchases from its AE

in comparison with the price paid by the non-AEs, that will lead to the

ITA Nos.5621 &5496/Del/2014

resultant higher profit to the assessee, if other things are equal. Transfer

pricing adjustment under CUP method is called for when the comparable

price in the uncontrolled transactions is less than that paid by the

assessee and not vice versa. In our considered opinion, this factor raked

up by the TPO has no bearing insofar as the determination of the ALP of

the purchase price is concerned.

4.5. We, therefore, countenance the view taken by the TPO in rejecting

the CUP as the most appropriate method.

TNMM vs. RPM

5.1. Having held that CUP is not a reliable method in the given

circumstances, let us see, which of the other two methods focused by

both the sides, namely, TNMM or RPM, can be considered as most

suitable.

5.2. The TPO, after rejecting the CUP method resorted to the TNMM

for determining the ALP of the international transaction. In doing so, he

observed that the assessee is dealing in the products which are unique in

nature and there are no reliable comparables available in the databases

ITA Nos.5621 &5496/Del/2014

used in India, namely, Prowess and Capita Line. He, therefore,

expanded the search process beyond the territory of India. Using

ORBIS database, firstly, he considered data of two companies of the

assessee group, namely, Swarovski, South Korea and Swarovski,

Singapore. The TPO has tabulated snapshot of Swarovski Korea Ltd. in

para 7.2 of his order. He took figures of four calendar years ending on

2002, 2003, 2004 and 2005 of this company, as under:-

FINANCIAL PROFILE Unconsolidated data SWAROVSKI KOREA LTD. 12/31/2005 12/31/2004 12/31/2003 12/31/2002 12 Months 12 Months 12 Months 12 Months th KRW th KRW th KRW th KRW Operating Revenue/Turnover 34,678,855 30,775,490 25,709,840 16,524,606 P/L before tax 1,654,056 1,478,171 -470,298 1,381,492 P/L for Period [=Net Income] 1,233,984 1,047,810 -485,282 954,396 Cash Flow 2,264,028 1,977,898 299,564 1,589,348 Total Assets 12,627,944 12,053,465 9,523,353 7,896,459 Shareholders Funds 3,375,307 2,141,323 1,093,512 1,578,794 Current Ratio (x) 1.65 2.19 1.47 1.85 Profit Margin (%) 4.77 4.8 -1.83 8.36 Return on shareholders Funds (%) 49.01 69.03 -43.01 87.5 Return on capital Employed (%) 30.58 23.11 -4 33.29 Solvency Ratio (%) 26.73 17.76 11.48 19.99

5.3. The TPO mentioned below the table that Swarovski, Korea made a

gross profit margin in the region of 48% to 58% during the period

ITA Nos.5621 &5496/Del/2014

31.12.2002 to 31.12.2005 and net profit margin in the range of 1.9% to

7.7%.

5.4. Then, he tabulated figures of Swarovski, Singapore in relation to

five Calendar years from 1999 to 2003 in para 7.3 of his order, as

under:-

SWAROVSKI SINGAPORE TRADING PTE LTD. FINANCIAL PROFILE Unconsolidated data 12/31/2003 12/31/20042 12/31/2001 12/31/2000 12/31/1999 12 Months 12 Months 12 Months 12 Months 12 Months th SGD th SGD th SGD th SGD th SGD Operating 48,036 38,247 33,149 31,576 25,356 Revenue/Turnover P/L before tax 2,707 2,479 2,401 3,325 1,752 P/L for Period [=Net 2,041 1,868 1,832 2,502 1,245 Income] Cash Flow 2,823 n.a 2,443 n.a 1,726 Total Assets 17,546 16,404 15,867 16,014 14,516 Shareholders Funds 11,485 11,444 11,576 11,528 9,025 Current Ratio (x) 2.04 2.36 2.78 2.76 2.05 Profit Margin (%) 5.64 6.48 7.24 10.53 6.91 Return on 23.57 21.66 20.74 28.84 19.41 shareholders Funds (%)

5.5. After mentioning profit margin below the table at net level of

5.64% on 31.12.2013, the TPO aggregated the results of Swarovski,

South Korea and Swarovski, Singapore and found that these two

ITA Nos.5621 &5496/Del/2014

companies dealing in Crystal goods and Crystal components were

earning profit margins at net level of 5% and gross level at 54%.

5.6. After ascertaining the above profit rates of two associated

enterprises, the TPO extended his search process using ORBIS database

to a set of 20 independent companies as under:-

Company Name Ctry Type of Template Year Current Profit Account Ratio Margin (x) (%) Median LY 1.06 0.61 SEJE AND PARTNERS FR U1 IND 2004 2.18 27.42 VIMPEX NL U1 IND 2004 1.89 22.77 INTERNATIONAL BV NUTRI-ACTIVE PTE SG U1 IND 2004 1.92 10.85 LTD. ADS-ANKER DATA NL C2 IND 2004 0.9 6.51 SYSTEM B.V. SWAROVSKI SG U1 IND 2003 2.04 5.64 SINGAPORE TRADING PTE LTD. K DIS DISTRIBUTION FR U1 IND 2004 1.99 4.25 SA NEW FOOD S.R.L. IT U1 IND 2005 1.12 2.83 CHOPARD (ASIA) PTE SG U1 IND 2003 1.18 2.81 LTD. CONSORZIO IT U1 IND 2005 1.05 2.19 MANTOVANO ARTIGI ANI EDILI ED AFFINI – SOCIETA CCOP DANNERT RU U1 IND 2005 1.04 0.84 TORGOVO – RU U1 IND 2001 0.96 0.39 PROMYSHLENNAYA KOMPANIYA GEK SCAR SUD OUEST FR U1 IND 2005 1.34 0.31 DEKORSTROIINVEST RU U1 IND 2005 1.01 0.14 TORGOVYI DOM RU U1 IND 2005 0.99 0.06 KONTAKTOR

ITA Nos.5621 &5496/Del/2014

DIEMME IT U1 IND 2005 1.02 0.03 DISTRIBUZIONE MODERN A SOCIETA CONSORTILE A RESP TORGOVYI DOM VKT RU U1 IND 2001 1 0.02 CONSORZIO APUANIA IT U1 IND 2005 1.05 0.01 ENERGIA CONSORZIO IT U1 IND 2005 1.06 -0.2 PRODUTTORI VINI DI VELLETRI SOCIETA’COOPERATIV A AGRICOLA FANITON RU U1 IND 2004 1 -0.27 ELOPAK LIMITED GB C1 IND 2000 1.35 -9.42 RIBOSEPHARM GMBH DElf IND 2005 n.a. n.a. Average 3.704286

5.7. It can be seen that all the companies in the above Table are foreign

unrelated entities, except one at Sl. no.6, namely, Swarovski Singapore

Trading Pte Ltd. Profit margin of these 20 companies was worked out at

4.185%, which the TPO found to be in the same range as earned by

Swarovski, South Korea and Swarovski, Singapore. He, thus, held that

4.185% was arm’s length margin for the assessee company. A further

adjustment of 5% on such arm’s length margin was given on account of

geographical region and market size, etc., thus, working out arm’s length

margin at net level of 3.976%. By applying such arm’s length margin,

he worked out transfer pricing adjustment amounting to Rs.5,70,90,836.

Thereafter, he ventured to make a Secondary analysis using gross profit

ITA Nos.5621 &5496/Del/2014

margins. In the discussion contained in para 8.2 onwards of his order,

the TPO noticed the margin of Swarovski, South Korea at gross level of

53.75% was comparable with the gross profit margin of 20 comparable

companies from the ORBIS database. By applying gross margin of

53.75%, he computed transfer pricing adjustment of Rs.3.74 crore. In

para 8.5, he discussed that the amount of adjustment is different in the

Primary and Secondary analysis, namely, by applying net and gross

level margins. Eventually, he averaged the amount of adjustment

computed under both the methods for proposing a final transfer pricing

adjustment of Rs.4,72,74,425/-. This is the amount of addition made by

the AO.

5.8. The ld. AR contended that the TPO was wholly unjustified in,

firstly, choosing the TNMM as the most appropriate method and then,

applying the same in a wrongful manner.

5.9. We will first take up the calculation of profit rates as has been

challenged before us. The TPO considered four calendar years of

Swarovski, Korea for working out the profitability at gross margin in

ITA Nos.5621 &5496/Del/2014

the range of 48% to 58% and then at net level of 1.9% to 7.7.%. It is

obvious from the Table itself as reproduced above, that the manner of

determination of percentages of 48 to 58% and 1.92 to 7.77% is not

deducible. Even the ld. DR could not point out how these percentages

were computed. Similar is the position qua the working of margin of

Swarovski, Singapore. The TPO referred to profit margin at net level of

5.64% as on 31.12.2003. It can be seen from the Table drawn by the

TPO as reproduced above that the rate of 5.64% is not emerging.

Position regarding the margins of this company referred by the TPO at

gross level of 54% and net of 5%, is also no different. It is not known

how these figures were calculated. Even the ld. DR could not help in

finding out how these figures were arrived at. This shows that the

calculations made by the TPO for determining the ALP of the

international transaction, are unfounded.

5.10. In order to appreciate the contentions of the ld. AR on the

application of TNMM, it will be apposite to set out Rule 10B(1)(e)

which contains the mechanism for application of the TNMM, as under :-

ITA Nos.5621 &5496/Del/2014

“ (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.”

5.11. Sub-clause (i) of the above rule, being the first step, provides that

the net profit margin realized by the enterprise from an international

transaction should be computed in relation to a base, such as, costs

incurred or sales effected or assets employed, etc. Sub-clause (ii)

provides that the net profit margin realized by the enterprise from the

ITA Nos.5621 &5496/Del/2014

comparable uncontrolled transaction is computed having regard to the

same base. Sub-clause (iii) provides that the net profit margin realized

by a comparable company, determined as per sub-clause (ii) above is

adjusted to take into account the differences, if any, between the

international transaction and the comparable uncontrolled transactions,

which could materially affect the amount of net profit margin. It is this

adjusted net profit margin of the unrelated transactions or of the

comparable companies, as determined under sub-clause (iii), which is

used as benchmark for the purpose of making comparison with the net

profit margin realized by the assessee from its international transaction

as per sub-clause (i). Sub-clause (iv) states that the net profit margin

realized by the enterprise, as referred in sub clause (i), is established to

be the same as a net profit margin referred in sub-clause (iii) of the

comparables. Sub-clause (v) states that the net profit margin thus

established is taken into account to arrive at an arm’s length price in

relation to international transaction. To summarize the position under

this method, the net operating profit margin realized by the enterprise

from an international transaction entered into with an associated 21

ITA Nos.5621 &5496/Del/2014

enterprise is computed in relation to costs incurred or sales effected or

assets employed or to be employed by the enterprise or having regard to

any other relevant base, which is then compared with the net operating

profit margin realized by the enterprise or by an unrelated enterprise

from a comparable uncontrolled transaction with a similar base.

5.12. We find that there are certain inconsistencies in so far as the

application of the above rule by the TPO is concerned. He worked out

transfer pricing adjustment, by averaging the amount of adjustment

computed by taking gross margins and net margins of comparables. All

the sub-clauses of rule 10B(1)(e) refer to the calculation of `net profit

margin’, which for all practical purposes is `operating net profit margin’

in the denominator of the formula. As against this, the TPO has not only

taken cognizance of the `Net profit’ in his calculation, but also went on

to apply gross profit margin, which is alien to the TNMM. His further

action of averaging the gross and net margins of comparables, is not

envisaged anywhere in the prescription of the rule. Further, sub-clause

(iii) of Rule 10B(1)(e) talks of computing net profit margins arising in

ITA Nos.5621 &5496/Del/2014

‘comparable uncontrolled transactions.’ Thus, it is essential that the

profit margin to be considered must be from a comparable uncontrolled

transaction. The term ‘uncontrolled transaction’ has been defined in

Rule 10A(a) to mean: ‘a transaction between enterprises other than

associated enterprises whether resident or non-resident.’ It is simple

and plain that an uncontrolled transaction is always between two non-

associated enterprises. A transaction between two associated enterprises

is considered as a controlled transaction and hence goes out of the ambit

of Rule 10B(1)(e)(ii). Both Swarovski, South Korea and Swarovski,

Singapore are associated enterprises of the assessee and their

transactions are with their respective AEs, thus making them controlled

transactions. Hence, these cannot be considered as comparable

uncontrolled transactions. In so far as the calculation of margin of 20

independent companies is concerned, we find that one of them is

Swarovski Singapore Trading Pte Ltd., whose business model is again

similar, thereby making it a controlled transaction. All the remaining 19

are foreign companies. The assessee distinctly placed a chart before the

ld. CIT(A) which has been reproduced on page 12 onwards of the 23

ITA Nos.5621 &5496/Del/2014

impugned order showing that all the 19 foreign companies were engaged

in altogether different lines of business, such as, Sports goods, Bicycle

shops, Manufacture and trader of shoes, Drug proprietors and sundries,

Dealer of raw material for construction products, Grocery and related

products, Purchase and sale of electrical energy and engaged in

producing wine and olive oil products, etc., etc. Notwithstanding the

fact that the TPO selected foreign companies as comparable, even such

companies operate in altogether different lines of business, which

contention has remained uncontroverted on behalf of the Revenue. This

also distorts the calculation of ALP by the TPO. In view of the

foregoing discussion, we are not inclined to approve the working of ALP

done by the TPO under the TNMM.

6.1. Now, we take up the issue about the selection of the most

appropriate method between RPM and TNMM in the given facts and

circumstances. The ld. AR vehemently argued that if the CUP method is

not to be applied, then, the next most appropriate method is Resale Price

Method (RPM). This was opposed by the ld. DR who contended that the

ITA Nos.5621 &5496/Del/2014

assessee characterized RPM as not the most appropriate method in its

Transfer pricing study report and, hence, now it should not be allowed to

argue contrary.

6.2. We are not inclined to jettison the contention made on behalf of the

assessee for consideration of RPM as the most appropriate method. The

mere fact that in Transfer pricing study report, the assessee itself treated

this method as not the most appropriate method, cannot be decisive in

consideration of the most appropriate method. In the same breath, the

assessee also characterized the TNMM as not the most appropriate

method, which the TPO has selected. We have noticed above that the

CUP treated by the assessee as most reliable method, is not really

reliable in the facts and circumstances of the instant case for determining

the ALP of the international transaction. Since both the TNMM and

RPM were treated by the assessee as not reliable, we need to focus on

merits as to which out of these two is the most suitable.

6.3. We have noted above the mandate of the TNMM as provided

under rule 10B(1)(e). At this juncture, it will be befitting to note the

ITA Nos.5621 &5496/Del/2014

prescription of rule 10B(1)(b), dealing with the mechanism for

determination of the ALP under the RPM, as under :-

“(b) resale price method, by which,— (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified ; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market ; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm’s length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise ;”

6.4. A perusal of the above mandate transpires that sub-clause (i) of

Rule 10B(1)(b) provides that the price at which the goods purchased by

ITA Nos.5621 &5496/Del/2014

the enterprise from its AE are resold, is identified. Such resale price

under sub-clause (ii) is reduced by the amount of normal gross profit

margin from the purchase and resale of the same goods in a comparable

uncontrolled transaction. The price so arrived at is reduced under sub-

clause (iii) by the amount of expenses incurred by the assessee and the

price so arrived at is adjusted to take into account the functional and

other differences between the international transaction and the

comparable uncontrolled transaction, if any. The adjusted price so

arrived under sub-clause (iv) is taken as the ALP in respect of purchase

of goods from the AE. It is clear from the command of sub-clause (i)

itself that the RPM is applied when the property purchased by the

assessee is resold as such. Sub-clause (ii) further provides for choosing

comparable cases in which similar property is purchased and resold.

Thus it is apparent that this method, by its very language, is applicable

where a property purchased from an AE is resold as such. Where,

however, some value addition is made to the goods before resale, the

RPM ceases to be an unfailing method.

ITA Nos.5621 &5496/Del/2014

6.5. Adverting to the facts of the instant case, we find that the assessee

purchased Crystal goods and Crystal components from its AE. No value

addition was made to such imports. The goods were sold as such. In the

given circumstances, the RPM is the most appropriate method for

determining the ALP of the international transaction of `Import of

Crystal goods and Crystal components’.

6.6. However, it is significant to note that the fact about a particular

method appearing prima facie as the most appropriate method cannot

block the road for determination of ALP of the international transaction

under some other method, if relevant data for its working under such

seemingly best method, is not properly available. The RPM talks of

applying normal `gross profit’ margin arising in comparable

uncontrolled transactions from the purchase and resale to the

international transaction. Thus, there is an underlying presumption that

all the relevant figures, including the amount of `gross profit’ on

purchase and resale of the comparables, are ex facie available from the

accounts of such comparables. If comparables so chosen do not reflect

ITA Nos.5621 &5496/Del/2014

the gross profit margin from purchase and resale of similar goods,

without any allocation or truncation, then, this method loses its

significance. If some of the otherwise functionally comparables make

available the relevant figures without any need to make allocation or

truncation, then the number of comparables should be restricted to such

companies. If there remains no such comparable having requisite

figures for determination of gross profit rate from purchase and resale of

similar goods, or if the relevant figures of the enterprise itself from

purchase and resale of goods under consideration are not available, then,

the RPM cannot be applied and it should be dispensed with. In such an

eventuality, the next best method should be applied.

order on this score and direct the AO/TPO to determine the ALP of the

transaction of Import of Crystal goods and Crystal components, firstly,

by applying the RPM. It is hereby clarified that the manner of

application of RPM is open at large before the TPO who will decide it

in the way he thinks expedient. Contention of the ld. AR that the

ITA Nos.5621 &5496/Del/2014

comparables should be restricted to the ten companies which it cited

before the ld. CIT(A) or twenty companies which the ld. CIT(A) suo

motu chose for making TP adjustment on account of AMP expenses,

cannot be accepted. We do not intend to eclipse the power of the TPO

by restricting the exercise, which he has yet to undertake for the first

time. It is further clarified that if due to one reason or the other as

discussed above, such a method cannot be applied, then, resort should be

made to the TNMM in the way enshrined in rule 10B(1)(e) of IT Rules,

1962, taking care of the infirmities discussed above in the earlier

calculation made by the TPO.

B. TP addition of AMP Expenses

8.1. During the course of first appellate proceedings, the ld. CIT(A)

observed that no transfer pricing analysis was done in respect of the

international transaction of advertisement, marketing and promotion

(AMP) expenses. The assessee was called upon to benchmark this

transaction. Taking note of bright line test and other relevant factual

details, the ld. CIT(A) made an addition of Rs.1,91,94,998/- towards

ITA Nos.5621 &5496/Del/2014

transfer pricing adjustment on AMP expenses. The assessee is

aggrieved against such adjustment.

8.2. The ld. AR, without making any elaborate arguments on the issue,

candidly submitted that transfer pricing adjustment of AMP expenses is

a recurring issue before the tribunal and the view consistently taken be

adopted here also. The ld. DR submitted that the tribunal has been

restoring this matter to the file of TPO for a fresh adjudication in the

light of the jurisprudence from the Hon’ble Delhi High Court on this

issue and similar order may be passed for this assessee as well.

8.3. On perusal of the order of the ld. CIT(A), it emerges that while

holding AMP expenses as an international transaction, he did not have

the benefit of the judicial precedents now available for consideration, in

some of which the transaction of AMP expenses has been held as an

international transaction, in others as not an international transactions,

while still in some others, the matter has been restored for fresh

consideration in the light of the judgment in Sony Ericson Mobile

Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del), in

ITA Nos.5621 &5496/Del/2014

which the AMP expenses as an international transaction has been

accepted. In another judgment dated 28.1.2016 of the Hon’ble Delhi

High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd.

(for the AY 2010-11), the question as to whether AMP expenses is an

international transaction, has been restored for a fresh determination.

There are three recent judgments of the Hon’ble Delhi High Court, viz.,

Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS.

Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose

Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar

issue has been restored for fresh determination in the light of the earlier

judgment in Sony Ericsson Mobile Communications India Pvt. Ltd.

(supra). Respectfully following the predominant view of the Hon’ble

High Court, we are of the considered opinion that it would be in the

fitness of things if the impugned order is set aside and the matter is

restored to the file of TPO/AO for a fresh determination of the question

as to whether there exists an international transaction of AMP expenses.

If the existence of such an international transaction is not proved, the

matter would end there and then, calling for no transfer pricing addition. 32

ITA Nos.5621 &5496/Del/2014

If, on the other hand, the international transaction is found to be existing,

then the TPO will determine the ALP of such an international

transaction in the light of the relevant judgments of the Hon’ble High

Court, after allowing a reasonable opportunity of being heard to the

assessee.

pricing additions towards `Import of Crystal goods and Crystal

components’ and `AMP expenses’ and remit the matter to the file of

AO/TPO for a fresh determination of their ALP in consonance with our

above observations and directions. Needless to say, the assessee will be

allowed a reasonable opportunity of being heard in such fresh

proceedings.

II. NON-TRANSFER PRICING ADDITIONS

10.1. Now we take up non-transfer pricing grounds in these cross

appeals. Ground nos. 24-27 of the assessee’s appeal and one additional

ground taken by the assessee assail the sustenance of addition on

account of Provision for doubtful debts and Provision for doubtful

ITA Nos.5621 &5496/Del/2014

advances. During the course of assessment proceedings, it was noticed

by the AO that the assessee made Provision for doubtful debts at

Rs.19,08,162/- and Provision for doubtful advances at Rs.3,43,870/-.

Addition was made for a total sum of Rs.22,52,032/- as these two

amounts , in the opinion of the AO, were not deductible. No relief was

allowed in the first appeal.

10.2. At the outset, the ld. AR contended that similar issue came up for

consideration before the Tribunal in assessee’s own case for the

immediately preceding year, namely, A.Y. 2003-04, in which similar

additions were deleted. A copy of such order dated 26.8.2016 in ITA

No. 100/Del/2011, was placed on record. On a specific query, the ld.

AR admitted that similar issue was there in assessee’s appeal for the

A.Y. 2002-03 as well, in which it was decided against the assessee. A

copy of such order dated 21.4.2016 in ITA No. 3472/Del/2010 was also

placed before the Bench. The ld. DR requested that the view taken in

the order for the A.Y. 2002-03 be followed.

ITA Nos.5621 &5496/Del/2014

10.3. It is noticed that the order for the A.Y. 2002-03 deciding the

issue against the assessee was passed prior to the order for the A.Y.

2003-04 deciding the issue in favour of the assessee. A perusal of the

later order divulges that there is no whisper, much less any reference

whatsoever to the order of the tribunal for the immediately preceding

year. The issue was argued before the tribunal as a new issue in the

proceedings for the A.Y. 2003-04 and the bench concurred with the view

canvassed by the assessee. In the extant proceedings also, the assessee

initially relied on and placed on record a copy of the order for the A.Y.

2003-04. It was only on a pertinent query from the Bench that the

tribunal order for the A.Y. 2002-03, deciding similar issue against the

assessee, was brought to the knowledge of the bench. In all fairness, it

was the duty of the parties to suo motu place a copy of the earlier order

on the same issue before the tribunal during the course of the

proceedings for the A.Y. 2003-04. Similarly both the orders ought to

have been placed before us as well without asking.

ITA Nos.5621 &5496/Del/2014

10.4. Notwithstanding the diagonally opposite views taken in the

orders for the earlier years on the same issue, we proceed to examine the

issue afresh. Provisions for doubtful advances disallowed by the AO

amounts to Rs.19,08,162/-. The ld. AR claimed that the amount is

deductible u/s 36(1)(vii) of the Act. Section 36(1)(vii) provides that:

“subject to the provisions of sub-section (2) the amount of any bad debt

or part thereof which is written off as irrecoverable in the accounts of the

assessee for the previous year” is deductible. This shows that two

conditions must be simultaneously satisfied for becoming eligible for

deduction u/s 36(1)(vii). The first is that the amount should be written

off as irrecoverable in the accounts of the assessee for the previous year

and the second is that the provisions of sub-section (2) of section 36

should be complied with.

10.5. Computation of the amount of Provision for doubtful debts has

been placed on page C-5 of the paper book. This is a detailed party-wise

and year-wise chart showing Opening balance of the provision for

doubtful debts, additions during the period, write back during the period,

ITA Nos.5621 &5496/Del/2014

other incomes written off and closing balance of the provision. On

enquiry, it was stated that the assessee is creating Provision for doubtful

debts and reducing it from the amount of Debtors for the purpose of

reflection in the balance sheet. However, there is no actual write off of

the amount of the debtor in the books of account at the time of creating

provision. It is only on becoming the debt bad in a later year that the

provision is debited and the account of the respective debtor is credited.

If a particular sum is recovered before the final write off, such amount is

reduced from the provision. To put it simply, the assessee has opened an

account of Provision for doubtful debts which is a running account.

Every year fresh provision, when created, is credited to such account.

On making recoveries or at the time of final write off, the provision

account is debited and net closing balance is carried forward to next

year. Account of the debtor in respect of which a provision is created

stands at gross level and the provision so created or adjusted is

separately kept until the amount of provision is finally written off or

back. This clarifies that the assessee is not writing off the amount of debt

in its books of account at the time of creation of provision. Only when it 37

ITA Nos.5621 &5496/Del/2014

finds in a later year that some amount is not recoverable, the relevant

portion is written off. Ergo, it is patent that the first condition of writing

off of the amount of debt in the books of account for the previous year at

the time of creation of provision and the consequential claim of

deduction, is lacking. As such, the eligibility for deduction u/s 36(1)(vii)

is lost. The assessee can claim deduction only at the time and to the

extent of the amount, which is actually written off in the books of

account of the debtor.

10.6. The ld. AR relied on the judgment of the Hon’ble Supreme Court

in the case of Vijaya Bank vs. CIT (2010) 323 ITR 166 to bolster for the

claim of deduction. This decision, in our considered opinion, is not

relevant now. The Hon’ble Supreme Court was dealing with A.Ys.

1993-94 & 1994-95 and it specifically noticed that : `we may reiterate

that it is not in dispute that s. 36(1)(vii) of 1961 Act applies both to

banking and non-banking businesses’. The statutory position has

undergone change. Now clause (viia) of section 36(1) specifically deals

with deduction : “in respect of any provision for bad and doubtful debts

ITA Nos.5621 &5496/Del/2014

made by (a) a scheduled bank…..”. It provides deduction in respect of

provision for bad and doubtful debts made by banks subject to certain

conditions. For other assessees, the provisions of clause (vii) of section

36(1) apply. The assessee is admittedly not a scheduled bank and the ld.

AR was fair enough to candidly accept that the case is covered under

clause (vii) and not clause (viia). Going by the language of clause (vii)

of section 36(1), as it stands for the relevant assessment year, there can

be no deduction at the time of creating a provision for doubtful debts.

The legislature has clarified this position beyond any shadow of doubt

by retrospectively inserting Explanation 1 to clause (vii) w.e.f. 1.4.1989

that : `For the purposes of this clause, any bad debt or part thereof

written off as irrecoverable in the accounts of the assessee shall not

include any provision for bad and doubtful debts made in the accounts

of the assessee’. This clinches the issue and clarifies the position

beyond an iota of doubt that a mere provision for doubtful debts is not

deductible in the case of a non-banking assessees. We are, therefore,

persuaded to uphold the impugned order in so far as the disallowance of

provision for doubtful debts is concerned. However, it is clarified that 39

ITA Nos.5621 &5496/Del/2014

the amount of actual write off during the year should be allowed as

deduction. The chart at page C-5 of the paper book shows such amount

written off at Rs.98,078/-. The AO is directed to verify if such amount

has been actually written off in the books of account. If it is so, then,

deduction should be allowed to that extent. As provision for doubtful

debts is not deductible, correspondingly its write back also cannot be

brought to tax. The AO is directed to determine accordingly. It is further

clarified that while allowing deduction in respect of bad debts actually

written off and not taxing the amount of write back of the provision, the

AO should ensure that no double deduction gets allowed. It has been

noticed above that the assessee was allowed deduction for such

provision in the proceedings for the A.Y.2003-04. In that view of the

matter, the actual write off of bad debts or write back of the provision,

to the extent already allowed at the time of write off, should not be

deducted or not taxed once again.

11.1. As regards the Provision for doubtful advances amounting to

Rs.3,43,870/-, the ld. AR contended that this amount represents write off

ITA Nos.5621 &5496/Del/2014

of amount due from Customs Department. It is obvious, as also accepted

by the ld. AR that it is the amount of advances written off and not any

bad debts written off. Unlike section 36(1)(vii) which provides for

deduction on account of simple write off of bad debt subject to the

fulfillment of conditions laid down in section 36(2), a write off of

advances, falls in a separate compartment. In order to be eligible for

such a deduction, the assessee is particularly required to prove the event

of occurrence of loss. Unless the loss is proved to have been occurred,

there can be no question of any deduction. Here is a case in which the

assessee is claiming write off of an amount due from Customs

Department. It goes without saying that no amount from a Government

Department can be considered as irrecoverable under any circumstance

so as to characterize it as a loss. We, therefore, following the view taken

by the Tribunal in its order for the A.Y. 2002-03, uphold the

disallowance. It is also clarified that a reversal of such a provision

should not attract any tax as has been discussed qua the Provision for

doubtful debts. In the like manner, it should also be ensured that there is

ITA Nos.5621 &5496/Del/2014

no double deduction in view of the decision allowing deduction at the

time of creation of a similar provision in relation to the A.Y. 2003-04.

12.1. Ground no. 28 of the assessee’s appeal is against the confirmation

of disallowance of a sum of Rs.47,47,698/- on account of Mediclaim

personal accidental insurance policy taken for the benefit of staff

members. The AO disallowed this amount by treating it as a personal

expense. The ld. CIT(A) upheld the disallowance by noticing that the

assessee paid premium to National Insurance Company Ltd. and hence,

the case falls u/s 36(1)(ib) of the Act. Since the assessee could not prove

that the insurance scheme of National Insurance Company was approved

by IRDA, he sustained the disallowance.

12.2. We are unable to concur with the view adopted by the ld. CIT(A)

in sustaining the disallowance. Admittedly, insurance policy was taken

by paying premium to National Insurance Company Ltd. We fail to

appreciate as to how the assessee can bring material on record to

demonstrate that the insurance policy taken from National Insurance

Company Ltd. was approved by IRDA. There is an underlying

ITA Nos.5621 &5496/Del/2014

presumption that all the nationalized insurance companies follow

guidelines of IRDA. It is too much to cast such a burden on the assessee

to prove that a particular insurance policy taken by it for its employees

from National Insurance Company Ltd. was approved by IRDA. Since

the assessee paid premium in respect of insurance policy taken for the

benefit of its employees, the deduction has to be allowed. We, therefore,

allow this ground of appeal.

13.1. The only other ground which survives in the assessee’s appeal is

against not allowing depreciation on foreign exchange loss of

Rs.8,50,330/- capitalized in the block of ‘Buildings.’ On perusal of the

details filed by the assessee and Schedule of fixed assets, it was

observed by the AO that there was an addition in the block of `Building’

amounting to Rs.1,45,31,376/-. The assessee could produce bills only

for a sum of Rs.1.10 crore, leaving a difference of Rs.34.47 lac. In the

first appeal, the assessee furnished certain more bills leaving a sum of

Rs.8,50,330/-, which was claimed as a foreign exchange loss booked on

account of reinstatement as on 31.3.2004. The ld. CIT(A) did not allow

ITA Nos.5621 &5496/Del/2014

capitalization in respect of forex loss and the consequential claim for

depreciation was also disallowed. The asssessee is aggrieved against it.

13.2. We have heard the rival submissions and perused the relevant

material on record. The short point is whether depreciation can be

allowed on forex loss on retranslation of loan taken in foreign currency

for Building. This depends on answer to the question as to whether such

forex loss can be lawfully added to the block of `Building’. It is

undisputed that loan in foreign currency was specifically taken for

Building in India, which is now being used for the business purpose.

13.3. Section 32(1)(i) of the Act deals with allowing of depreciation. It

provides that depreciation in the case of any block of assets, including

`Buildings’, shall be allowed at such percentage on the `written down

value’ thereof as may be prescribed. The term `written down value’ has

been defined in section 43(6) of the Act in the case of any block of

assets, to mean (i) in respect of any previous year relevant to the

assessment year commencing on the 1st day of April, 1988, the

aggregate of the written down values of all the assets falling within that 44

ITA Nos.5621 &5496/Del/2014

block of assets at the beginning of the previous year and adjusted, (A)

by the increase by the actual cost of any asset falling within that block,

acquired during the previous year; (B) by the reduction of the moneys

payable in respect of any asset falling within that block, which is sold or

discarded or demolished or destroyed during that previous year together

with the amount of the scrap value, if any, so, however, that the amount

of such reduction does not exceed the written down value as so

increased. This provision indicates that increase in the block of assets is

envisaged only by actual cost when an asset is acquired during the

previous year. This brings us to consideration of the connotation of the

expression `actual cost’, which, in turn, has been defined in section

43(1) to mean `the actual cost of the assets to the assessee, reduced by

that portion of the cost thereof, if any, as has been met directly or

indirectly by any other person or authority’. There are certain

Explanations to this provision and none of them deal with the forex loss

or gain in the circumstances as are prevailing before us. Then, there is

section 43A, which contains special provisions consequential to changes

in rate of exchange of currency. This section provides that : 45

ITA Nos.5621 &5496/Del/2014

`Notwithstanding anything contained in any other provision of this Act,

where an assessee has acquired any asset in any previous year from a

country outside India for the purposes of his business or profession and,

in consequence of a change in the rate of exchange during any previous

year after the acquisition of such asset, there is an increase or reduction

in the liability of the assessee as expressed in Indian currency (as

compared to the liability existing at the time of acquisition of the asset)

at the time of making payment, (a) towards the whole or a part of the

cost of the asset; or (b) towards repayment of the whole or a part of the

moneys borrowed by him from any person, directly or indirectly, in any

foreign currency specifically for the purpose of acquiring the asset along

with interest, if any, the amount by which the liability as aforesaid is so

increased or reduced during such previous year and which is taken into

account at the time of making the payment, irrespective of the method of

accounting adopted by the assessee, shall be added to, or, as the case

may be, deducted from the actual cost of the asset as defined in clause

(1) of section 43’. A conjoint reading of the above provisions discerns

that ordinarily in a block of assets, the actual cost of an asset fixed 46

ITA Nos.5621 &5496/Del/2014

before putting it to use does not change later on. Block of assets

increases with the actual cost of any asset falling within that block,

acquired during the previous year. Forex gain or loss effects the cost of

an asset only u/s 43A and that too w.r.t. the translation of foreign

currency at the time of making payment. This section applies only when

the assessee acquires any asset in any previous year from a country

outside India. Section 43A is not applicable when an asset is acquired

from India, albeit with a loan obtained in foreign currency. Thus it is

overt that forex loss in respect of assets acquired in India cannot be

treated as cost of acquisition so as to increase the value of block of

assets for entitling the assessee to depreciation. If the contention of the

ld. AR is accepted that such increase due to forex loss is contemplated

u/s 43(1) itself and there is no need to approach section 43A, then the

very existence of section 43A becomes meaningless. Placement of a

separate section 43A shows that increase in the actual cost due to forex

loss, and that too at the time of making payment, is not permissible but

for this provision, which applies only to an asset acquired from a country

outside India only. As the assessee acquired Building in India, neither 47

ITA Nos.5621 &5496/Del/2014

section 43 nor section 43A can apply and consequently no capitalization

of such forex loss can be allowed. Our view is fortified by the judgment

in the case of CIT vs. Woodward Governor India (P) Ltd. (2009) 312

ITR 254 (SC) in which the Hon’ble Supreme Court, noting the

provisions of section 43A held that : `Sec. 43(1) defines actual cost for

the purpose of grant of depreciation etc. to mean "the actual cost of the

assets to the assessee". Till the insertion of the unamended s. 43A there

was no provision in the IT Act for adjustment of the actual cost which

was fixed once and for all, at the time of acquisition of the asset.

Accordingly, no adjustment could be made in the actual cost of the

assets for purposes of grant of depreciation for any increase/decrease of

liability subsequently arising due to exchange fluctuation’. Reliance of

the ld. AR on India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) is

misplaced. In that case, it was held that interest on loan taken for

business is deductible, irrespective of the fact that such a loan has been

used for revenue or capital purpose. It is obvious that in that case the

question was of allowing deduction of interest on capital borrowed for

business purpose and not of depreciation on the increased value of asset 48

ITA Nos.5621 &5496/Del/2014

due to change in foreign currency rate after its acquisition. Obviously,

the assessee has been granted deduction of interest on such loan taken

for acquiring `building’ and dispute is only for depreciation on the

amount of forex loss capitalized by the assessee, which issue is governed

by Woodward Governor (supra) and not India Cements (supra). We,

therefore, hold that the authorities below were justified in denying

depreciation on increase in the cost of `Buildings’ effected by the

assessee due to translation of foreign currency loan at the end of the

year. This ground fails.

14.1. The only ground taken by the Revenue in its appeal is against the

deletion of addition of Rs.46,20,099/- on account of disallowance of

advertisement and publicity expenses. The assessee claimed

advertisement and publicity expenses amounting to Rs.1.93 crore. The AO allowed deduction for 1/3rd of the amount by amortising it over a

period of three years. That is how the remaining amount was disallowed.

The ld. CIT(A) deleted this disallowance.

ITA Nos.5621 &5496/Del/2014

14.2. After considering the rival submissions and perusing the

relevant material on record, we find that this issue is no more res integra

in view of the judgment of the Hon’ble jurisdictional High Court in CIT

vs. Citi Financial Consumer Fin. Ltd. (2011) 335 ITR 29 (Del) in which

it has been held that the entire expenditure on publicity and

advertisement is allowable fully in the year in which it is incurred. We,

therefore, uphold the impugned order on this score. Similar view has

been taken by the Tribunal in the assessee’s own case for the A.Y. 2002-

AO in subsequent two years, be granted as the same will lead to double

deduction. If such a deduction has been allowed, then the same be

accordingly reversed pro tanto. This ground of the Revenue is not

allowed.

ITA Nos.5621 &5496/Del/2014

the Revenue is dismissed.

The order pronounced in the open court on 10.02.2017.

Sd/- Sd/-

[KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated, 10th February, 2017. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.