RENAULT INDIA PRIVATE LIMITED,SRIPERAMBUDUR vs. DCIT, CHENNAI

This appeal of the assessee is directed against the order of the Assessing Officer consequent to the direction of Dispute Resolution Panel for the assessment year 2009-10.

The first issue arises for consideration is treatment of foreign exchange gains earned on cancellation of forward contracts.

Shri Sriram Seshadri, the Ld. representative for the assessee, submitted that the assessee-company set up an automobile manufacturing plant in the State of Tamil Nadu. In the course of setting up of plant, the assessee imported plant and machinery from outside India, more particularly from Japan. The advance payment made by the assessee for import of plant and machinery was classified as “capital work in progress”. To protect the foreign exchange fluctuation with respect to import of plant and machinery, the assessee entered into forward contracts with BNP Paribas. According to the Ld. representative, the assessee took eight numbers of forward contracts. Due to suspension of automobile manufacturing plant, the original forward contracts were cancelled. Due to cancellation for forward contracts, the assessee- company earned net foreign exchange gain of `25,82,81,725/- which was classified as income from other sources in the financial statements. The Ld. representative further submitted that since the foreign exchange gain was earned in the course of import of capital asset, namely, plant and machinery, the same was considered as capital receipt and not offered for taxation. According to the Ld. representative, any receipt in relation to purchase or sale of capital asset has to be necessarily considered as capital receipt, therefore, the gain in foreign exchange due to cancellation of forward contracts has to be treated as capital receipt and not liable for taxation.

The Ld. representative for the assessee further submitted that forward contract was taken by the assessee to protect the increased capital cost due to foreign exchange fluctuation and not for earning profit in the course of its business activity. The Ld. representative further submitted that had the plant and machinery was installed, the gain arising out of foreign exchange fluctuation would definitely go to reduce the cost of the plant and machinery.

On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that had the assessee imported plant and machinery, the gain due to foreign exchange fluctuation may go to reduce the cost of the plant and machinery. In the case before us, admittedly, the assessee has not imported any plant and machinery, therefore, there is no question of increasing or decreasing the cost of asset due to foreign exchange fluctuation.

We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee placed order for import of plant and machinery in the process of setting up a plant in the State of Tamil Nadu. In order to protect the assessee from foreign exchange fluctuation with regard to import of capital goods, namely plant and machinery, from Japan, the assessee entered into forward contract with BNP Paribas.

In the case before the Apex Court, the assessee is engaged in the business of manufacturing of locomotive boilers and locomotives. For the purpose of manufacturing activity, the assessee had to purchase plant and machinery from various countries including USA. The assessee appointed a New York company, which is subsidiary of the assessee, as purchasing agent in USA. Thereafter, the assessee found it more expensive to buy American goods as Government of India imposed some restrictions on imports from USA. The assessee with the permission of Reserve Bank of India repatriated $ 49,500. This resulted in surplus and the Assessing Officer assessed the same as profit arising in the course of business activity. However, this Tribunal found that part of the surplus to the extent of $ 36,123 was from trading profit. On a reference, the Apex Court found that the surplus to the extent of $ 36,123 was an accretion to the assessee’s fixed capital and was not liable for taxation. In the case before us also, the assessee placed orders for purchase of plant and machinery from Japan. Since the proposal for setting up of plant was suspended, the forward contract taken was cancelled, which resulted in the net profit of `25,82,81,725/-.

The question arises for consideration is when the assessee gained to the extent of `25,82,81,725/- due to foreign exchange fluctuation, whether the same would be classified as revenue receipt or capital receipt? The fact remains that the forward contract was taken to insulate / protect the assessee from the possible loss that may be suffered due to foreign exchange fluctuation in the course of purchasing of plant and machinery. It is not in dispute that the plant and machinery which was proposed to be purchased for the purpose of setting up of plant in the State of Tamil Nadu, which is a capital asset. When the assessee cancelled / suspended the setting up of plant in the State of Tamil Nadu and cancelled the forward contract, this Tribunal is of the considered opinion that the loss or gain would be relatable to the purchase of capital asset, namely, plant and machinery. Therefore, the loss or gain arose to the assessee due to cancellation of forward contract on account of foreign exchange fluctuation has to be treated as capital in nature. Merely because the assessee suspended the setting up of plant in Tamil Nadu and cancelled forward contract, that cannot be a reason to treat the gain arising on account of cancellation of forward contract as revenue receipt. Since the transaction was relatable to acquisition of capital asset, namely, plant and machinery by way of import from Japan, this Tribunal is of the considered opinion that the gain due to foreign exchange fluctuation would definitely be on the capital field. Therefore, this Tribunal is unable to uphold the order of the Assessing Officer.

The next ground of appeal is with regard to failure of the Assessing Officer to give credit of advance tax to the extent of `54,61,897/-.

Shri Sriram Seshadri, the Ld. representative for the assessee, submitted that the assessee has paid advance tax to the extent of `54,61,897/-, which was not given credit by the Assessing Officer.

On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that if the assessee declared income for the assessment year under consideration corresponding to the advance tax paid, the Assessing Officer would have given the credit. However, it is not known whether the assessee has declared the corresponding income in the return. If the return does not contain the details of income with regard to advance tax payment, naturally the Assessing Officer would not give the necessary credit.

We have considered the rival submissions on either side and perused the relevant material available on record. When the assessee has paid advance tax to the extent of `54,61,897/-, the same has to be given credit while computing the tax payable by the Assessing Officer. Under normal circumstances, income-tax has to be paid on the assessed income. However, the Income-tax Act provides for payment of tax on income in advance before assessment of total income. When the assessee pays the tax in advance as per the scheme of Income-tax Act, this Tribunal is of the considered opinion that the Assessing Officer has to necessarily give credit to the advance tax paid by the assessee. Accordingly, the orders of the lower authorities are set aside and the issue of advance tax credit to the extent of `54,61,897/- is remitted back to the file of the Assessing Officer. The Assessing Officer shall verify the details of advance tax paid by the assessee and thereafter give necessary credit, if the advance tax was actually paid by the assessee.

The next issue arises for consideration is with regard to interest under Section 234C of the Act.

Shri Sriram Seshadri, the Ld. representative for the assessee, submitted that interest under Section 234C of the Act has to be levied on the returned income and not on the assessed income. In this case, the Assessing Officer levied interest on the assessed income and not on the returned income.

On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that Section 234C of the Act provides for interest for non-payment of advance tax within the time prescribed.

We have considered the rival submissions on either side and perused the relevant material available on record. Section 234C of the Act provides for payment of interest for deferment of advance tax. The assessee claims before this Tribunal that a sum of `54,61,897/- was paid as advance tax, however, the same was not given credit. While considering the failure of the Assessing Officer to give credit to the advance tax to the extent of `54,61,897/-, this Tribunal finds that the matter needs to be verified and the credit should be given if the assessee paid advance tax. Since the interest is levied for non-payment of advance tax and the assessee claims that the advance tax paid was not given credit, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside in respect of levy of interest under Section 234C of the Act and the issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall re- examine the issue afresh and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee.

The next issue arises for consideration is with regard to adjustment proposed by the Dispute Resolution Panel while determining the arm's length price.

Shri Sriram Seshadri, the Ld. representative for the assessee, submitted that the assessee is engaged in the business of engineering design and drawings of motor cars, specifically catering to the Indian market. The design services are in relation to aesthetic like of the motor vehicle which covers both interior and exterior of the vehicle. The assessee selected eight comparables and determined arithmetic mean at 12.13%. However, out of the eight comparables, the Transfer Pricing Officer found six comparables selected by the assessee are not similar to the assessee. Referring to Akshay Software Technologies Ltd., the Ld. representative submitted that the TPO rejected the comparable on the ground that Akshay Software Technologies Ltd. is engaged in software trade pertaining to financial services. Referring to Mahindra Consulting Engineers Ltd., the Ld. representative submitted that the TPO found that this company is also not similar to assessee-company on the ground that Mahindra Consulting Engineers Ltd. provides consulting services to water supply, sewerage, etc. Referring to CSS Technergy Ltd., the Ld. representative submitted that the TPO found that no segmental analysis was available. The TPO has also found that CSS Technergy Ltd. provides engineering and information technology services to utilities, aerospace and healthcare. Similarly, Tata Elxsi Ltd., Vama Industries Ltd. and KLG Systel Ltd. were also rejected by the TPO on the ground that their functions are not similar to that of the assessee-company. The Dispute Resolution Panel, however, classified the assessee’s function as Knowledge Process Outsourcing. According to the Ld. representative, the function of the assessee is design engineering services and not knowledge process outsourcing. None of the company selected by the TPO are engaged in the business of providing engineering design service. All the companies selected by the assessee and compared by the TPO are engaged in IT enabled services. Therefore, the comparison made by the TPO with that of the companies which are not doing similar functions, cannot be a foundation for making transfer pricing adjustment. According to the Ld. representative, without comparing the comparable companies which are performing similar functions, the DRP proceeded on the presumption of utilization of multiple year data. Unless and until the comparable companies are engaged in the business, which are similar in nature as that of assessee-company, according to the Ld. representative, the same cannot be compared with that of the assessee-company.

On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the price of international transaction needs to be compared with the price of uncontrolled comparable transaction. The Ld. D.R. further submitted that the uncontrolled transaction took place in the same financial year makes better comparables. If the international transaction and uncontrolled transaction took placed in different financial year, then the difference in time periods makes the uncontrolled transaction as not comparable. Referring to Rule 10B(4) of the Income-tax Rules, 1962, the Ld. D.R. submitted that the most appropriate data to be used shall be the data relating to the financial year in which the transaction is entered into. The TPO as well as the DRP have also referred Rule 10B and found that since no functionally similar companies are available, the TPO and DRP have to necessarily consider the multiple year data available in the public domain.

We have considered the rival submissions on either side and perused the relevant material available on record. We have carefully gone through the provisions of Rule 10AB of the Income- tax Rules, 1962, which reads as follows:-

With the above observation, the appeal filed by the assessee is partly allowed for statistical purposes.