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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order of the AO
dated 09/01/2014 u/s 144C(13) r.w.s.92CA(3) of the income tax act
consequent to the directions issued by the DRP, Chennai on 20.12.2013
in FN No.DRP/CHE/66/2013 for the AY 2009-10. The assessee raised the
following grounds in it’s appeal:
ITA No.624/Mds/2014 :- 2 -:
For that the order of the Assessing Officer is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the Appellant and at any rate is opposed to the principles of equity, natural justice and fair play. 2. For that the Assessing Officer erred in disallowing the loss on account of exchange fluctuation amounting to ₹53,39,000/- based on the contention that it is a notional loss and capital in nature.
For that the Assessing Officer failed to appreciate that loss was made in order to comply with the mandatory accounting standards. 4. For that the Assessing Officer failed to appreciate that the assets for which the loan was taken were already put to use and hence the expenditure is allowable as Revenue. 5. For that without prejudice to the contention that exchange rate fluctuation on restatement of ECB loan to the tune of ₹53,39,000/- should be allowed as a Revenue deduction, the Assessing Officer ought to have added it to the cost of the fixed assets and allowed depreciation on the same. 6. For that the Assessing Officer erred in making an adjustment of ₹15,98,138/- to the Arm’s Length Price determined by the Appellant.
For that in determining the Arm’s Length Price, the Assessing Officer failed to appreciate the Appellant’s contention that the aggregate of the transactions entered into by the Appellant with its Associated Enterprise should be considered while determining Arm’s Length. 8. For that where the aggregate of all differences between the sale price to Associated Enterprise and sale price to non-Associated Enterprise is within the tolerance limit set out in the second proviso to Section 92C(2), no adjustment is required on account of Arm’s Length Price.
For that the appellant objects to the levy of interest u/s.234B of the Income Tax Act.
2.0 Ground No.1 is general in nature which does not require specific
adjudication.
3.0 Ground Nos.2 to 5 are related to the disallowance of foreign
exchange loss amounting to ₹53,39,000/-. During the assessment
proceedings, the Assessing Officer [(hereinafter referred to as AO) found
that the assesse has taken the External Commercial Borrowings (in short
‘ECB’) loan converted into foreign currency)] and incurred a sum of
₹53,39,000/- towards the foreign exchange loss which was due to the
ITA No.624/Mds/2014 :- 3 -:
restatement of foreign exchange fluctuation. The AO was of the view that
the loss was due to conversion of ECB loan in to Indian currency on
account of restatement to follow the accounting standards which was
notional in nature and is neither the Revenue nor the capital expenditure and accordingly AO disallowed a sum of ₹53,39,000/-. The assesse went
before the Dispute Resolution Panel (in short ‘DRP’) and the DRP agreed
with the view of the AO and held that the expenditure was not allowable
u/s.37 and also not permitted to make adjustment u/s.43A to include the
actual cost, since it is applicable only when the asset is acquired in India.
4.0 The AO passed the Assessment Order on receipt of directions from
the DRP u/s.143(3) r/w Sec.144C of Income tax act by Order dated 09.01.2014 making the addition of ₹53,90,000/-.
5.0 Aggrieved by the order of the AO, the assesse filed the appeal
before this Tribunal.
5.1 During the appeal hearing, the Ld.AR argued that the assesse has
purchased the assets and the assets were put to use by taking the ECB
loan and incurred loss on account of foreign exchange fluctuation as per
the mandatory accounting standards and the same is revenue in nature
which should be allowed as deduction. The assessee also furnished Paper
Book containing loan documents and loan agreements. The assesse has
ITA No.624/Mds/2014 :- 4 -:
borrowed a sum of 3.00 lakhs Euros from M/s.Mainette on 21.06.2006 for
financing capital expenditure towards purchase of machines and moulds.
The assesse has purchased the capital assets by using ECB loan.
Similarly, the assesse also furnished loan agreement dated 16.05.2007 for ₹4.00 lakhs Euros. Both the loans were for the purpose of purchase of
capital assets of the assessee’s business. According to the assesse, since
the assets were put to use the expenditure accrued after commencement
of business should be allowed as Revenue expenditure. Alternatively, the
Learned Authorized Representative (hereinafter referred to as ‘Ld.AR’) of
the assessee claimed that exchange rate fluctuation on re-statement of
ECB loan to be added to the cost of fixed assets and allow the depreciation
on the assets. The assessee relied on the following decisions:
(i) CIT v Woodward Governor of India(P) Ltd.312 ITR 254(SC) (ii) CIT v Maruti Udyog Ltd 320 ITR 729 (SC)
5.2 On the other hand, the Learned Departmental Representative
(hereinafter referred to as ‘Ld.DR’) argued that the assesse has
borrowed the funds for the purpose of capital assets and the expenditure
accrued on re-statement of foreign exchange loss is a capital loss which is
not allowable as Revenue expenditure. Ld.DR also argued that Sec.43A is
applicable for inclusion of increase or decrease in foreign exchange
fluctuation to the cost of asset in the case of assesse acquiring the asset
from foreign country but not for the external borrowings. According to the
Ld.DR, the expenditure is neither allowable u/s.37(1) nor allowed to be
capitalized.
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6.0 We heard the rival submission and perused the material placed on
record.
The assesse has borrowed ECB loan for the purpose of capital
expenditure and incurred fluctuation loss of ₹53,90,000/- and claimed it
as a Revenue expenditure. The ECB loan was borrowed for the purpose of
acquiring the capital assets and the assets were not acquired from outside
the country. The loss was due to restatement of the External commercial
Borrowing of Loan, converted in to Indian currency. There was no actual
payment but as a mandatory to follow the accounting standard the loss
was restated. The assessee relied on Hon’ble Apex court judgment in the
case of CIT v Woodward Governor of India(P) Ltd.312 ITR 254(SC). The
assessee has specifically brought to our attention to Para No.18 wherein
Hon’ble Apex court held as under:
AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on Initial Recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under section 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important
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point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a- vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period.
6.1 From plain reading of the Hon’ble apex court decision the
expenditure is relatable day to day running of the business which is
indicated from the ‘outstanding liability relating to import of raw
materials’. Therefore, the reliance placed by the assessee is of not helpful
to the assessee. The Hon’ble Apex court in the decision cited supra dealt
with the capital accounts in Para No.22 to34 and amended provisions dealt
with in Para No.34 as under:
Lastly, we are of the view that amendment of section 43A by the Finance Act, 2002 with effect from 1-4-2003 is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended section 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words "at the time of making payment". In other words, under the unamended section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended section 43A with effect from 1-4-2003 such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in section 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature.
6.2 In the instant case, the assessee has borrowed the ECB loan
subsequent to the amendment of section 43A and the condition placed in
the amendment was on actual payment. In the assessee’s case no
payment was made and the loss was notional and no adjustment can be
made in the cost of actual cost of the asset. The assessee also relied on
Hon’ble Apex court decision in the case of Maruti Udyog ltd Cited supra
which was delivered by the Hon’ble apex court following the decision of
Woodward Governor of India cited (supra) which relates to prior to the
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amendment of Sec.43A. Therefore, the case laws relied up on by the
assesse are not applicable in the assessees’s case to allow the same as
Revenue expenditure as well as to include the same as actual cost.
6.3 On the similar facts, the Co-ordinate Bench of ITAT, Hyderabad, in
ITA No.2095/Hyd/2011 held that in the case of M/s.M+W Zander (s) Pvt.
Ltd., Vs. assessee on 06.06.2012 was held as under:
Brief facts of the issue are that it is the claim of the assessee that it has obtained loan from its head office for an SGD 15,00,000 and SGD 10,00,000 respectively. It also filed letter dated 25.4.2005 and RBI's letter dated 26.4.2005 stating that with respect to the execution of particular projects, it had borrowed certain monies on repatriation basis from its head office. The assessee also referred to Bombay High Court decision in the case of CIT v. Dempo and Co. Pvt. Ltd. (206 ITR 291) wherein it has summed up the position that for determining whether the devaluation loss is revenue or capital what is relevant is utilisation of the amount at the time of devaluation and not the object for which the loan was taken. Also it was held that loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not. The assessee referred to the case of CIT vs. Woodward Governor India Pvt. Ltd. (312 ITR 254) (SC).
The contention of the assessee is that u/s. 43A whenever there is an increase in the liability of the assessee as expressed in Indian currency, the liability is to be allowed at the time of making payment. However, section 43A deals with a case wherein the assessee has acquired a capital asset and in the case of the assessee it has borrowed for the purpose of working capital and hence liability has arisen on account of revenue account and the same is admissible.
We have heard both the parties and perused the material on record. From a reading of the entire AS-11 and also the extracts it follows that loan is a non-integral foreign operation with reference to the head office, so long as branch is independently conducting its business activities. In the case on hand the branch is independently carrying out contracts in this country and hence, the fluctuation in the rate of exchange cannot have effect on its integral operations. The entire transaction is non-integral in nature and hence, the same is to be treated as per para 24 of AS- 11. The fluctuations in the rate of foreign exchange on the quantum of loan would not affect the day to day working or the profit of a given year. It would affect only on repayment at the time of settlement. Hence, the gain or loss is to be accumulated in the reserve account until the date of settlement whereupon it can be credited or debited in the Profit and Loss A/c. Hence, the loss claimed is to be carried forward in the foreign currency translation reserve account and squared up at the time of settlement. It cannot be allowed till the time of settlement. Accordingly, we confirm the order of the CIT(A) on this issue. This ground of the assessee is dismissed.
7.0 Following the decision of Co-ordinate Bench of ITAT, Hyderabad, we
hold that the loss claimed is to be carried forward in the foreign currency
translation reserve account and squared up at the time of settlement. The
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claim made by the assesse cannot be allowed till the time of settlement
and accordingly we do not find any infirmity in the order of the lower
authorities and the order of the AO is confirmed.
8.0 Ground Nos.6 to 8 are related to the transfer pricing adjustment of ₹15,98,138/-. During the assessment proceedings, the AO found the
international transaction of ₹60,87,92,802/- relating to purchase of raw
materials consumables some finished goods and capex, etc. The AO
referred the issue to the TPO for determining ALP of international
transaction. The assesse is tested party and the method adopted by the
assesse is Comparable Uncontrolled Price (in short ‘CUP’) method. The
TPO accepted the method adopted by the assesse and analyzed by transaction and arrived at difference of ₹15,98,138/- in sale of finished
goods for upward adjustment. The AO has issued draft Assessment Order
and the assesse filed objections before the DRP in response to the draft
Assessment Order as per the Sec.144C of Income Tax Act. Before the
DRP, the assesse argued that there was no difference in ALP considering
the totality of transactions instead of individual transactions. The assessee
argued that the transactions of the assessee with the AE was not an
isolated transaction and there were series of transactions and hence to be
considered in totality. Further the AR submitted if permissible tolerance
limit (+/- 5%) is allowed the transactions of sales are at ALP. Similarly in
the case of purchases from assessee net result of comparison of the price
ITA No.624/Mds/2014 :- 9 -:
charged by the AE to assessee vis-a vis the price charged by the AE to the
other parties is positive to the extent of Rs.1.9 crore.The DRP rejected the
contentions of the assesse and upheld the proposal made by the AO
holding that there is no dispute in adopting CUP method and also that
there is no multiple comparable prices for each transaction. Accordingly,
the AO has passed Assessment Order u/s.143(3) r/w Sec.144C on 09.01.2014 making upward adjustment of ₹15,98,138/- on account of
sale of finished goods.
9.0 Aggrieved by the Order of the AO, the assesse is on appeal before
us. The Ld.Counsel argued that aggregating of transactions entered into
by the assessee with the Associated Enterprise should be considered while
determining the ALP. The aggregation of all difference between the sale
price to Associated Enterprise and sale price to non-Associated Enterprise
is within the tolerance limit no adjustment is required on account of ALP.
10.0 Though, in certain instances, the sale price to Associated Enterprise
is lower than the sale price to non-Associated Enterprise, there were
other transactions where the reverse was also true, the instances where
the sale price to Associated Enterprise was higher than the sale price to
non-Associated Enterprise also should be taken into account while
determining the ALP. If the same is considered, the net difference is
positive. Further, analysis of purchase from Associated Enterprise, net
result of comparison of price charged by the Associated Enterprise to the
ITA No.624/Mds/2014 :- 10 -:
assessee vis-a-vis, the price charged by the Associated Enterprise to third parties is positive to the extent of ₹1.90 Cr. Further, even assuming that
there is a negative difference of ₹15,98,138/- the purported difference is
within the tolerance limit of 5% prescribed in proviso to Sec.92C of IT Act.
11.0 On the other hand, the Ld.DR relied on the decision of lower
authorities’ orders and stated that for the AY 2007-08 in the case cited
(Supra), the Hon’ble ITAT held that ALP to has be determined by
considering both purchase and sales from Associated Enterprise since
these are part of the same class of transactions. The Ld.DR further
submitted that the assesse is carrying on two kinds of activities, first
activity is manufacturing and selling of Hangers and second activity is in
trading Hangers. The assesse purchased manufactured hangers from glue
works and sold to third parties in India. The Hon’ble ITAT for the AY
2007-08 directed the AO to consider the aggregation of purchase and
sales under the impression that the assessee is carrying only trading
activity. Since the assesse had international transaction with Associated
Enterprise and it selected CUP method as most appropriate method to
bench mark the purchase and sale transactions the aggregation of
transactions is not permitted in view of section92B(1)(a) r.w.r 10B(1)(a).
According to the Ld.DR, no interference is called for.
12.0 We heard the rival submissions and perused the material placed on
record.
ITA No.624/Mds/2014 :- 11 -:
The Ld.AR of the assessee submitted Paper Book and furnished the
details of sales made to Associated Enterprise where it has charged lower
price than that of third parties and also higher price than that of to third
parties. If the total transactions are aggregated, there is a positive
amount of ₹18,84,775/-. The assessee has sold the products to third
parties as well as Associated Enterprise, in some instances the assesse
sold products to third parties higher than the price charged to Associated
Enterprise and vis-à-vis AE. From the above details furnished by the
assesse, it is seen that the price charged to third parties some times
higher than the Associated Enterprise and sometimes lower than the
Associated Enterprise. On the similar facts in the assessee’s own case, for
the AY 2010-11 in ITA No.616/Mds/2015 dated 24.08.2016 the Co-
ordinate Bench has remitted the matter back to the file of the AO to re-
compute the ALP by taking in to consideration both the net difference on
the sale from the AE and purchase from AE following the decision in
assessee’s own case in ITA No.1789/Mds./11 decided on 16.03.12 as
under:
We have heard the submissions of both the parties and have perused the orders of the authorities below as well as the order of the Tribunal relied upon by the Ld. A.R. We find that the issue in hand has already been dealt with by the Tribunal in the case of the assessee in ITA No.1789/Mds./11 decided on 16.03.12. The findings of Tribunal are reproduced herein under:- “8. We have considered the rival submissions. Perusal of the provisions of Sec.92C shows that the words used is “in relation to an international transaction - - - - - - having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons”. The term ‘class of transaction’ and ‘nature of transactions’ come to the forefront in the present case. In the assessee’s case, the transaction with the AE is not one of simple purchase or simple sale. The assessee purchases from one and sells to another. The assessee has purchased from its AE in Hongkong, Srilanka, Malayasia, Pakistan and RANDY Asia and has sold to its AE in Srilanka, Korea, Hongkong, Gulf, Egypt, Bangladesh,Malayasia, Taiwan, UK and Pakistan. In regard to the sales made by the assessee, the transaction with Bangaladesh is in positive, the transaction with
ITA No.624/Mds/2014 :- 12 -:
Egypt is in negative, the transaction with Gulf is in the positive, the transaction with Hongkong is in negative, the transaction with Korea is in positive, the transaction with Srilanka is in the negative, the transaction with Malayasia is in the negative, the transaction with Pakistan is in the negative, the transaction with Taiwan is in the negative and the transaction with UK is in the negative. Thus, what is noticed is that on the purchase the assessee has a positive differential i.e. the assessee purchases at a lower price from its AE than the non-AE and when its sales to the AE, its selling price is lower than the selling price as compared with the non-AE. There is no question that the assessee is generating profits from the transaction. There is no dispute that the assessee is also paying taxes on the profits that it has generated from its transaction of purchase and sale with its AE. The assessee, thus it is noticed, is doing the business of trading when it purchased from its AE from one country and sells to another AE in another country. This margin could be on account of both foreign exchange fluctuations as also the mark up done by the assessee. These transactions clearly show that what is done by the assessee is one of purchase and sale. With this in mind reading of the provisions of Sec.92C shows that the word used is “nature of transaction”. “nature of transaction” would be a particular set of transaction, which are to be seen together. When the assessee is buying from one place and selling at another that would be a “class of transaction”. When the assessee is doing the business of trading, it would not be a right to hold that the purchase is one “class of transaction” and the sales are another “class of transaction”. The assessee dealing with the AEs is a better position to negotiate better prices and consequently would be able to get a better bargain. Here, what is to be seen is whether the transaction of purchase and sale being the nature of transactions, when seen in consolidated from, generates profits which normally would be generated. For this both the purchase and sale transactions would have to be considered. To explain by an example, the assessee purchases a product at ₹10 from its AE. The same product is sold by a non-AE at ₹12/-. The assessee sells the finished product to its AE at ₹15/-. The same finished product is sold by a non-AE at ₹17/-. The profits from both transactions, assessee to AE, as also non-AE to non-AE would give ₹5/- But for the purpose of determining the ALP as the assessee purchases from its AE at a price lower than non-AE, the purchase price would be accepted as the deviation is negative i.e. ₹10/- is lower than ₹12/-, but as the assessee sells to its AE at a price lower than a non-AE, the sale price will be adjusted to the selling price of the non-AE as the deviation is positive i.e. ₹15/- is lower than ₹17/-. Therefore, ₹17/- will be considered as ALP. This would result in – The assessee buys from the AE at ₹10/- i) The assessee’s sale price is adjusted to ALP at ₹17/-. ii) Thus the profit of the assessee will be determined at ₹7/-. Now if we compare the profitability, assessee’s purchase and sale to AE is ₹5/-. Percentage of profit 5 X 100 = 33.33% 15 Non-AE purchase & sale is ₹5/- Percentage of profit 5 X 100 = 29.41% 17 After adjustment profit is ₹7/-
Percentage of profit 7 X 100 = 41.17% 17 Thus the profitability if considered without considering the positive deviations would lead to impossible profitability positions, which is not what is contemplated under the provisions of 92C. In the circumstances, the Assessing Officer is directed to re- compute the ALP by taking into consideration both the net difference on the sale
ITA No.624/Mds/2014 :- 13 -:
from the AE and purchase from the AE. The Assessing Officer may look into the fact as to the margins of the profits in regard to the transactions done by the assessee with its AE, as also the non-AE transactions and then compute the adjustment of ALP, if any. In the circumstances, the grounds Nos.5, 6, 8 & 9 of the assessee stand partly allowed for statistical purposes.” Respectfully following the order of the Co-ordinate Bench of this Tribunal, this ground of appeal of assessee is allowed for statistical purposes with similar directions to the Assessing Officer.”
13.0 Though, the assessee is having manufacturing and trading activity,
the assessee has purchased the goods from Associated Enterprises and
manufacturing the hangers similarly purchased the finished goods and
selling the hangers. Both activities are integral part but not independent
to each other. Though the purchase of raw material is from the AE, sale is
the common activity of the assesse and sales are made both to the
Associated Enterprises and non-Associated Enterprises either from the
purchases made out of finished products or manufactured products.
Therefore the profitability has to be considered with the aggregate of
purchases and sales but not isolating purchases and sales separately.
Therefore, we are of the opinion that even the assessee is having two
activities the Order of this Co-ordinate Bench in the assessee’s own case
is squarely applicable. Respectfully following the order of the Co-ordinate
Bench of this Tribunal (supra), this ground of appeal of assessee is
allowed for statistical purposes with similar directions to the Assessing
Officer. Accordingly, this ground of the appeal is allowed for statistical
purposes.
ITA No.624/Mds/2014 :- 14 -:
14.0 In the result, the appeal of the assessee allowed for statistical purposes.
Order pronounced in the Open Court on 15th March, 2017, at Chennai.
Sd/- Sd/- (एन.आर.एस. गणेशन) (�ड.एस. सु�दर �संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER
चे�नई/Chennai, �दनांक/Dated: 15th March, 2017. TLN
आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 6. गाड� फाईल/GF