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Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI
Before: SHRI N. K. SAINI & SMT. BEENA A. PILLAI
Date of hearing: 27.07.2016 Date of Pronouncement: 12.09.2016 ORDER
PER BEENA A. PILLAI, JM:
1. This appeal is filed by Revenue against the order dated 30.01.2011 passed by Ld. CIT(A) XX, New Delhi for the Assessment Year 2005-06 on following grounds: “1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.21,92,11,000/- on account of disallowance of the provision for liquidated damages.
2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.12,10,74,346/- on account of foreign exchange fluctuation loss.
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3. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.23,93,22,490/- for the purpose of computing the book profit u/s 115JB of the IT Act.
4. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.3,19,22,989/- on account of transfer pricing addition u/s 92CA(3) of the IT Act.”
Brief facts of the case are as under: 2.1 Ericsson India Private Limited (hereinafter referred as 'the assessee') is a company incorporated under the Indian Companies Act, 1956. The assessee is a wholly owned subsidiary of Telefonaktiebolaget LM Ericsson, Sweden ('LME'). LME is the ultimate holding company of all Ericsson Group Companies located in various countries across the globe. 2.2 During the relevant Assessment Year 2005-06 under consideration, the assessee was engaged in the business of manufacturing of electrical apparatus for line telephone or telegraphy including such apparatus for carrier current line system and parts thereof, marketing of telecommunication equipment, implementation and commissioning of telecommunication equipment meant for mobile telephony, internet services and rendering technical services in connection therewith and development of telecommunication related software. 2.3 For the year under consideration, the assessee filed its return of income on 31st October 2005 declaring a total
3 I.T.A.No1927/Del/2011 income of Rs.56,17,34,062/-. Ld. A.O. made the following additions and completed the assessment: S.N. Particulars Amount (Rs.) 1 Capital investment subsidy 3,17,392 2 Provision for Liquidate damages 21,92,11,000 3 Foreign exchange Los Fluctuation 12,10,74,346 4 Transfer Pricing addition in pursuance of 3,19,22,989 order u/s 92CA(3) of the Act 2.4 Aggrieved by the order of Ld. A.O., assessee preferred an appeal before Ld. CIT(A) Ld. CIT(A) deleted the addition on the basis of submissions made by the assessee. 2.5 Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us now.
At the outset, the Ld. A.R. submitted that ground No.1 to 3 raised in the Revenue’s appeal stand squarely covered by the orders passed by Coordinate Benches of this Tribunal in assessee’s own case for earlier / previous assessment years s under; 3.1 Ground No.1 stands covered by order passed for Assessment Years 2001-02. 2002-03. 2003-04 and 2004- 05 in assessee’s own case which is placed at page 95-158 of the Paper Book, the relevant paras of these orders are as under: Assessment Year 2001-02: “3.8 The excess provision on account of liquidated; damages was offered to tax under section 41(1) of the Act in the subsequent years 'as the same were waived of by the Customer.
4 I.T.A.No1927/Del/2011 Hence, there is no infirmity in' method of accounting as- stated' by, the Ld. CIT(A) in its order in, respect ,of accounting followed by the appellant in respect of Liquidated Damages.
In view of the above facts and the legal position, the claim in respect of liquidated damages is allowable as liability accrued in the year under appeal, hence allowable under section 37(1) of the Act.”
Assessment Year 2002-03: “20. Thus, it has been concluded by the Tribunal that liquidated damages is allowable as liability accrued in the year under appeal, hence, allowable u/s 37(1) of the Act. No material has been brought on record by the Revenue that the facts of the present year differ from the facts in assessment year 2001-02. One of us (i.e., Accountant Member) is the party to the said decision. Following the said decision of the Tribunal which is in assessee’s own case for preceding year, we allow both the grounds. We hold that liability regarding liquidated damages is allowable liability during the year under consideration, hence, could not be added either under normal computation of income or while computing income u/s 115JB of the Act. These grounds raised by the assessee are allowed.”
Assessment Year 2003-04 & 2004-05: “25. In the assessment orders, the A.O. made disallowance ofRs.252,679,327/- and Rs.156,071,161/- in Assessment Year 2003-04 and 2004-05 respectively, claimed as provision for liquidated damages by the assessee on the reasoning that it was in the nature of contingent liability and, therefore, was not allowable u/s 37(1) of the Act.”
3.2 Ld. D.R. was fair enough to concede to the above submissions of Ld. A.R.
5 I.T.A.No1927/Del/2011 3.3 It is submitted that there is no change in the facts and circumstances of the case for the year under consideration vis-à-vis the previous / earlier years. Respectfully following the same, we are of the considered opinion that assessee is eligible for the deduction in respect of provision for liquidated damages as revenue expenditure allowable u/s 37(1) of the Act.
Ground No.2 stands covered by the orders passed for Assessment Years 2002-03, 2003-04 and 2004-05. The relevant paragraphs of the said orders are as under: Assessment Year 2002-03: “23. Apropos Ground No.2; this issue is discussed by the AO in para 9 to 9.4. Total expenditure of Rs.2,44,14,276/- was claimed by the assessee in respect of loss on account of foreign exchange fluctuation. A sum of Rs.1 67,63,500/- as incurred on actual payment basis and a sum of Rs.76,51,226/- represented accrued liability. Such claim of the assessee was disallowed by the AO on the ground that expenditure had not accrued during the current financial year. The CIT (A) has deleted the disallowance following the decision of Special Bench Delhi in the case of ONGC 83 ITD 151.
It was pointed out by Ld. AR that the issue is now covered in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of CIT vs. Woodward Governor (I) Pvt. Ltd. 294 I 45 wherein it has been held at increase in liability in the revenue account as a result of the fluctuation in the rate of foreign exchange is not notional or contingent and, therefore, the same is allowable as deduction.
On the other hand, Ld. DR relied on the order of the AO and pleaded that the order of the CIT (A) on 6 I.T.A.No1927/Del/2011 this issue should be set aside and that of the AO be restored.
We have carefully considered the rival submissions in the light of the material placed before us. It has been observed by their Lordships in the aforementioned decision in the case of Woodward Governor (supra) that it is a judicially accepted position that in determining whether there has in fact been "accrual of liability or income", the accountancy standards prescribed by ICAI would have to be validly applied. Their Lordships have confirmed the decision of ITAT in the case of ONGC which was held to have rightly followed the settled position as explained in the judgement of Hon'ble Supreme Court which were referred to before Hon'ble High Court and the submission of Revenue was rejected that in the revenue account cases, the increase in liability on account of fluctuation in the foreign exchange prevailing on the last day of the financial year is notional or contingent and cannot be allowed as a deduction in terms of Section 37 of the Act. It will be relevant to reproduce the following observations of their Lordships from the said decision:-
We may briefly summarise our conclusions:
(i) The judicially accepted position appears to be that in determining whether there has in fact been "accrual" of liability or income.- the accountancy standards prescribed by the ICAI would have to be followed and applied.
(ii) In the context of the revenue account cases, we affirm the decision of the ITAT in Oil & Natural Gas Corpn. Ltd.'s case (supra) which rightly follows the settled position as explained in the judgment of the Hon'ble Supreme Court which we have referred to. We, therefore, reject the submission of the appellant in these appeals that in the revenue account cases, the increase
7 I.T.A.No1927/Del/2011 in liability on account of the fluctuation in the rate of foreign exchange prevailing on the last day of the financial year is notional or contingent and. Therefore, cannot be allowed as a deduction in terms of section 37 of the Act.
(iii) In the capital account cases where the cost of asset has been either paid fully or in part prior to the fluctuation in the rate of foreign exchange, the cost of the asset would correspondingly be permitted to be reworked for purposes of repayment or depreciation or investment allowance as the case may be with reference to the rate prevailing on the last date of the financial year in which the fluctuation occurs.
(iv) The amendment -to section 43A with effect from 1-4-2003 is prospective. There is no scope for entertaining the revenue's plea to the contrary.
In view of the above discussion, the substantial question of law that arises in these appeals is answered in affirmative by holding that the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year is allowable as a deduction and is not merely notional or contingent. Accordingly, the question is answered in favour of the assessee and against the revenue.
In this view of the situation, we find no infirmity in the order of the CIT (A) vide which the disallowance has been deleted. Therefore, ground No.2 of the Revenue is also dismissed.”
Assessment Year 2003-04 & 2004-05: “31. In the assessment orders the AO disallowed a sum of Rs.201772016/- and a sum of 8 I.T.A.No1927/Del/2011 Rs.33765008/- in assessment years 2003-04 and 2004-05, respectively, which was claimed by the assessee on account of foreign exchange fluctuation loss on the reasoning that the expenditures had not accrued to the assessee in. assessment years under consideration.
32. On appeal the CIT(A) following the order of his predecessor dated 9-12-2005 passed for assessment year 2002-03, coupled with other decisions, allowed the fluctuation loss claimed by the assessee in the assessment years under consideration.
Before us ld. AR for the assessee submitted that the issue involved in ground no. 3 of the appeals of the Revenue relating to claims of deduction on account of foreign exchange fluctuation loss now stands squarely covered in favour of the assessee by virtue of the following orders of the Hon'ble ITAT in assessee's own case as well as the decision of Hon’ble Jurisdictional High Court of Delhi wherein the loss due to foreign exchange fluctuation while importing goods was held to be allowable as a revenue loss :-
Assessment year 2002-03 in ITA No. 695/0/2006. Refer to para 27 at page 75 of this compilation.
2. Also covered in favour of assessee by the decision of Jurisdictional High Court of Delhi in the case of CIT v / s. Woodward Governor, 294 ITR 451 (Copy placed at pages 93 to 123 of this compilation of assessee.)
On the other hand, ld. DR for the Revenue was fair enough to concede to the above submissions of Id. AR for the assessee.
In this view of the matter and respectfully following the order (supra) of the Tribunal and the order of Hon'ble Delhi High Court in the case of 9 I.T.A.No1927/Del/2011 Woodward Governor (supra) the issue relating to foreign exchange fluctuation loss is decided in favour of the assessee and against the Revenue. Consequently, the order of CIT(A) in this regard is upheld and ground no. 3 of the instant appeals of the Revenue are rejected.”
4.1 Ld. D.R. was fair enough to concede to the above submissions of Ld. A.R. 4.2 It is submitted that there is no change in the facts and circumstances of the case for the year under consideration vis-à-vis the previous / earlier years. Respectfully following the orders of the Tribunal and Hon'ble Delhi High Court in the case of CIT Vs Woodward Governor reported in 294 ITR 451, the issue relating to foreign exchange fluctuation loss is decided in favour of the assessee and against the Revenue. Consequently, ground No.2 of the instant appeal of the Revenue is rejected.
Ground No.3 stands covered by order for Assessment Years 2003-04 and 2004-05. The relevant paragraphs are paras 41 to 43. This Tribunal has upheld the findings of Ld. CIT(A) therein. It is further observed that Ld. CIT(A), in the appeal before us has followed the order for Assessment Year 2003-04 passed by Ld. CIT(A). 5.1 We find that there is no illegality or infirmity in the well reasoned orders of Ld. CIT(A) deleting the impugned additions made by the Ld. A.O. in respect of the provisions referred to hereinabove for the purpose of computing book
10 I.T.A.No1927/Del/2011 profits u/s 115JB because the orders of Ld. CIT(A) are in consonance with the view taken by this Tribunal in assessee’s own case and with the view taken by the Hon'ble Delhi High Court in the cases CIT Vs HCL Commet System & Services, 292 ITR 299 (Del.) for the previous Assessment Year 2003-04 and 2004-05, the orders of Ld. CIT(A) in this regard are upheld and ground No.3 of the instant appeal of the Revenue is rejected.
Ground No.4; The Revenue has raised this ground in lieu of addition being deleted on account of transfer pricing adjustment made by the Ld. TPO to an extent of Rs.,3,19,22,989/-. Brief facts on the transfer pricing adjustment are as under: 6.1 During the year under consideration, the assessee had undertaken International Transaction with its Associate Enterprises, which are as under:
Segment Profit Level Indicator EIL Margin Name (PLI) Wireless Operating Profit/Sales 6% segment (OP/Sales) Wireline Operating Profit/Total 7% segment Cost (OP/TC) Softeare OP/TC 28% Segment 6.2 In the Transfer Pricing (TP) study, the assessee selected Transactional Net Margin Method (TNMM) as the most appropriate method for the determination of arm’s length price for the international transactions entered by 11 I.T.A.No1927/Del/2011 the assessee in each of the aforementioned business segments. 6.3 The Ld. TPO accepted the margins earned by the assessee in each of the three business segments. However, in respect of transaction pertaining to reimbursement of cost related to wireless segment by Associated Enterprise to assessee for purchase and supply of ancillary / non-core equipment such as antennas / filters to customer of EAB in India, was objected by Ld. TPO. The Ld. TPO considered the supply of equipment to the AE as sales and support services and added a markup of 6% on such costs to cost reimbursements thereby enhancing the total income by Rs.3,19,22,989/- contending that the transaction must be benchmarked separately. Ld. A.O. gave effect to the order of Ld. TPO. 6.4 Aggrieved by the adjustment made, the assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) ongoing through the submissions, deleted the adjustment made by the Ld. TPO. Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us. 6.5 Ld. D.R. submitted that cost pertaining to the purchase of ancillary equipments were reimbursed by its AE’s on cost to cost basis without any markup. He submitted that such an arrangement between the assessee and its AE is not supported by any documentary evidence. He thus submitted that the TPO was correct in 12 I.T.A.No1927/Del/2011 applying cost + 6% markup on the reimbursements made by the AE on purchase of ancillary equipments. 6.6 On the contrary, Ld. A.R. submitted that the Ld. TPO ha not appreciated the nature of services provide by the assessee to its AE in relation to supply of telecom ancillary equipment. Ld. A.R. elaborated upon the functions performed by the assessee. 6.7 In wireless segment, the assessee procures core telecommunication equipments from the AEs and sells the same to telecom Operators. Further he submitted hat assessee undertakes implementation and commissioning of telecommunication systems and also provides marketing support services to its AEs. In the wireline segment, the assessee undertakes manufacture of telecommunication equipments for sale to independent customers, and also provide marketing support services to its AEs. In software segment, the assessee undertakes contract software development for its AEs. 6.8 Ld. A.R. further submitted that the assessee did not undertake any significant function or effort with respect to the said transaction. Further, the assessee does not bear any risk such as Market Risk, Product Service Risk, Credit Risk etc. He submitted that the assessee did not undertake any significant functions nor was it exposed on any significant risks. Ld. A.R. submitted that since the activity did not warrant any significant effort on part of the assessee and also as the AE was befitting from these
13 I.T.A.No1927/Del/2011 supplies as its work pertaining to installation would be completed on time, the assessee agreed to the transaction. A copy of the agreement between the assessee and EAB is enclosed in the paper-book (pages 186-189).
We have perused the records placed before us and the orders passed by the authorities below. On perusal of the agreement entered between the AE and the assessee clearly shows that the later acts only as a facilitator for its AE and does not undertake any transaction on a regular basis. The main purpose of undertaking such a transaction was to achieve administrative convenience for the AE. The assessee merely acts as an intermediary or facilitator for administrative convenience of the AE. Therefore, the transaction of cost recharge for supply of hardware is a mere pass through cost which is timely reimbursed to the assessee by the AE and cannot entail a markup since no service is being rendered. 7.1 It is observed that the Ld. CIT(A) has dealt with the issue a length and has examined the scope and nature of services rendered by the assessee to its AEs in each segment. Ld. CIT(A) observed as under: “36. I have carefully examined this issue and considered submissions made by the appellant in the light of the material available on record, the main bone of contention is whether the appellant has undertaken significant functions, employed significant assets and borne significant risks with respect to the cost reimbursement transaction.
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The claim of the appellant is that with respect to the said transaction it has not undertaken any significant functions, employed significant assets and borne significant risks with respect to the cost reimbursement transaction. To explain the same the appellant has undertaken a detailed analysis of Functions performed, Assets employed and Risks assume (FAR) of the said international transaction of reimbursement of costs by the AEs and based on the FAR analysis it has concluded that with respect to the said international transaction the appellant has not undertaken any significant functions, employed significant assets and borne significant risks. The appellant in its submissions has submitted that the only function undertaken by it with respect to the sad international transaction was the supply of ancillary telecom equipment on which it had incurred transportation cost and personal cost. However, such cost was not significant and the same has been captured in the overall cost base of the Wireless segment, which the TPO has also accepted to be at arm's length
In my considered view a FAR analysis forms the bedrock of any transfer pricing analysis. In the instant case the appellant by way of any FAR analysis has clearly demonstrated that it did not undertake any significant functions, employed significant assets and borne significant risks. Ericsson India Pvt. Ltd. Further, the appellant has also submitted sample copies third party invoices for the said international transactions which also mentions the name of the customer to which it is supplied.
Further, I have also examined the agreement between the appellant and its AE from where it is observed that for supply of equipment the contract is between Bharti and the AE, The relevant extract of the agreement is produced below:
15 I.T.A.No1927/Del/2011 Quote: General:
WHEREAS, EAB is engaged in the business of supply of GSM, CDMA, WCDMA and related products; WHEREAS, EIL is engaged in the business of manufacture, marketing and sale of telecommunication products, provision of network roll out and support services and marketing and business promotion; WHEREAS. EAB has entered into a Contract with respect to procurement and sale of certain equipment and materials with Bharti Cellular Ltd. ("Bharti ") dated 22nd December 2003 (the "Bharti Supply Contract "); Further it is observed that the appellant is instructed by its AE for purchase and supply of ancillary equipment such as antennas and filters. The relevant extract of the agreement is produced below:
Quote:
WHEREAS, pursuant to the Bharti Supply Contract, EAB has desired and EIL has agreed to procure and supply antennas, filters, etc. as instructed by EAB from time to time effective April 2004 to Bharti.
The above extract clearly indicates that the primary contract has been entered into between the AE and Bharti and the appellant purchases and supplies the equipment at the instruction of AE. The above extracts clearly indicates that the primary contract has been entered into between the AE and the appellant purchases and supplies the equipment at the instruction of the AE.
Based on the facts present and the material placed on record, I accept the appellant's contention that the cost reimbursement transaction was 16 I.T.A.No1927/Del/2011 undertaken by the appellant only for administrative convenience and the appellant had not undertaken any significant activity in this regard.”
7.2 We do not find any infirmity in the findings of the Ld. CIT(A). We therefore, confirm the same and dismiss this ground of appeal raised by the Revenue.
In the result, appeal filed by the Revenue stands dismissed. Order pronounced in the open court on 12th Sep., 2016.