FRANCOIS COMPRESSOR INDIA PVT.LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(2),, PUNE

आयकर अपीलीय अिधकरण, पुणे �यायपीठ “सी” पुणे म� IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE (Through Virtual Court) BEFORE SHRI INTURI RAMA RAO, AM AND SHRI PARTHA SARATHI CHAUDHURY, JM आयकर अपील सं. / ITA No.2504/PUN/2017 िनधा�रण वष� / Assessment Year : 2013-14 ………. अपीलाथ� / Francois Compressor India Pvt. Ltd., GAT No.147/1(New), Lavale Road, Appellant Pirangut, Tal. Mulshi, Dist. Pune – 412115. PAN : AABCF0496K. बनाम v/s ………. ��यथ� / The Dy.Commissioner of Income Tax, Circle 1 (2), Pune. Respondent Assessee by : Shri Sharad Shah. Revenue by : Shri Amol Kamat. सुनवाई क� तारीख / Date of Hearing : 05.08.2021 घोषणा क� तारीख / Date of Pronouncement : 18.08.2021 आदेश / ORDER PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the final assessment order dt.31.08.2017 passed under Sec.143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to “the Act”) for the assessment year 2013-14. 2. The brief facts of the case are as under : The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of development and sale

of Software Services. The return of income for the A.Y. 2013-14 was filed on 29.09.2013 declaring total income at Rs.Nil. The appellant also reported the following international transactions in Form 3CB of the TPO order. Sr. Name of AEs Nature of Amount Method No. Transaction 1 AF Compressors Sale of Goods 11,45,823 TNMM (Kunshan) Co. Ltd, China 2 AF-Distribution Sale of Goods 2,86,65,338 TNMM Centre FZE, Dubai 3 Ateliers Francois SA, Sale of Goods 12,42,26,938 TNMM Belgium. 4 Ateliers Francois SA, Rendering of 3,12,73,628 CPM Belgium. Services 5 AF Compressors Rendering of 7,91,871 CPM Middle East, Dubai Services 6 Ateliers Francois SA, Purchase of Goods 13,55,21,234 TNMM Belgium. (Import) 7 Ateliers Francois SA, Purchase of Capital 3,44,961 CUP Belgium. Goods 8 Moteurs et-Francois, Interest on External 9,46,705 CUP Belgium Commercial Borrowing (Euro) Moteurs et-Francois, 9 Interest on External 95,68,678 CUP Commercial Belgium Borrowings (USD) Moteurs et-Francois, 10 External 1,65,18,000 CUP Commercial Belguim Borrowings (USD) 34,90,03,176 Total The assessee company sought to justify that the above international transactions are undertaken at Arms Length Price (ALP). For this purpose, the assessee company also submitted a TP Study Report. On noticing the above international transactions undertaken by the assessee company, the Dy. Commissioner of Income Tax, Circle – 1(2), Pune (hereinafter referred as “the Assessing Officer”), referred the matter u/s 92CA(1) of the Act to the

Transfer Pricing Officer (TPO) for the purpose of bench marking of the above international transactions. The TPO vide order dated 27.10.2016 passed under Sec.92CA of the I.T.Act suggested the T.P. adjustment of Rs.7,55,91,764/-. On receipt of the order u/s 92CA(1) of the I.T. Act, the AO vide Draft Assessment Order dt.25.11.2016 proposed the following additions : 1. Disallowance of adjustment to the value of international transaction at Rs. 7,55,91,764/- 2. Disallowance u/s 40(a)(ia) of the Act at Rs.95,000/-. 3. Disallowance u/s 41(1) of the Act at Rs.91,387/-. 4. Disallowance u/s 36(1)(va) of the Act at Rs.15,243/- 3. After receipt of the draft assessment order, the appellant had filed objections before the Hon’ble Dispute Resolution Panel (hereinafter referred as “the D.R.P.”) seeking correction in computation of operating profit of the assessee by including the “Changes in inventory” of Rs.3,31,30,815/- and as well as correction in operating profit of one of the comparables namely, Anest Iwata Motherson Ltd., by contending that the TPO adopted operating profit as 10.11% as against -10.11% and the assessee also objected the action of the Assessing Officer denying the capacity utilization on the ground that similar adjustment was not made in the earlier assessment years. The assessee company also objected before the Hon’ble DRP that TP adjustment, if any, should be restricted to the A.E. transaction alone. The ld DRP after due consideration of the statements made by the assessee, directed the AO / TPO to correct the operating profit of the assessee company by making the corrections in the “Changes of inventory” and also

directed the AO / TPO to adopt the correct margin of the comparables at - 10.11% as against the 10.11% adopted by the TPO. The Hon’ble DRP issued directions vide order dated 27.06.2007 giving certain directions. As regards the capacity utilization, the ld.DRP held that in the absence of any reliable data submitted by the assessee on capacity utilization and also the data as to how the capacity under utilization claimed the assessee has affected its profitability vis-à-vis the comparables, no adjustment on capacity utilization can be made. However, the Hon’ble DRP accepted the alternative plea of the appellant that depreciation adjustments should be allowed by directing the Assessing Officer to work out the depreciation adjustment in accordance with the decision of Delhi Bench of the Tribunal in the case of Global Vantedge Pvt. Ltd., which has been followed by Pune Bench of the Tribunal in the case of Brinton Carpets Pvt. Ltd. 4. After receipt of the direction from DRP, the Assessing Officer passed final assessment order dated 31.08.2017. While doing so, the Assessing Officer worked out the TP adjustment at Rs.3,08,01,105/- and also made addition of Rs.1,09,35,000/- by disallowing the foreign exchange variation loss and ECB loan which are utilized for the purpose of acquisition of capital asset in India. 5. Being aggrieved by the final assessment order, the appellant is in appeal before us in the present appeal and raised the following consolidated grounds of appeal and additional grounds of appeal, which read as under :-

“1. The ld.AO/Ld. TPO erred in ignoring (& Ld.D.R.P. erred in confirming) the difference in capacity utilization as compared to the capacity utilization of comparable and therefore erred in not granting in capacity utilization adjustment as claimed by the assessee. 2. The ld.AO/Ld. TPO erred by not correctly interpreting the direction of DRP resulting in lesser relief by Rs.33,18,153/- (in respect of capacity utilization based on depreciation adjustment as given by Ld.D.R.P. 3. The ld.AO erred in making (& Ld.D.R.P. erred in confirming) a disallowance of Rs.95,000/- u/s 40(a)(ia) for non-deduction of TDS on software purchase considering it to be payment against licensee fees, whereas it was actually relating to purchase of goods. 4. The ld.AO erred in making (& Ld.D.R.P. erred in confirming) a disallowance of Rs.15,243/- towards employee’s contribution to PF and ESIC paid after the due date as prescribed in PF/ESIC Act but paid before the due date of filling of income tax return. 5. The ld.AO erred in making an addition of Rs.1,09,35,000/- by misinterpreting the DRP directions and applying the provisions of S.43A of the IT Act. 6. The ld.D.R.P erred in directing that the foreign exchange loss on assets being capital in nature cannot be allowed as deduction while computing the total income of the assessee. Additional Ground No.1 The ld. TPO has erred (and Ld.D.R.P. erred in confirming) in making TP adjustments on total turnover of the assessee instead of making adjustment on relevant international transactions only. Additional Ground No.2. The appellant pleads that your honours grant the benefit of +/-5 percent as per proviso to section 92C(2) of the Income Tax Act, 1961. Additional Ground No.3 On without prejudice to all the grounds relating to allowability of unrealized Forex loss relating to Indigenous assets, the learned AO be directed to allow capitalization of such unrealized forex loss of Rs.1,04,75,704/- to respective assets and allow corresponding benefit of depreciation. 6. Grounds of appeal no.3 and 4 are not pressed. The additional ground of appeal no.2 is also not pressed. 7. Grounds of appeal no.1 and 2 challenge the correctness of the working of adjustment on account of capacity utilization in conformity with

the directions of the Hon’ble DRP. It is contended that the Assessing Officer had not complied with the directions of the DRP while working out the adjustment on account of capacity utilization. The details of working had not been furnished. 8. On the other hand, ld. DR has no objection to remand the matter back to the file of the Assessing Officer to furnish the working of capacity utilization carried out by the Assessing Officer. 9. We heard the rival submissions and perused the material on record. The working of capacity utilization carried out by the Assessing Officer does not form part of the assessment order. Needless to say, the directions of the DRP has to be mandatorily complied with by the Assessing Officer while passing the final assessment order. In the absence of any details furnished by the Assessing Officer, we remand the matter back to the file of the Assessing Officer to work out the adjustment on account capacity utilization in terms of the directions issued by the Hon’ble DRP, after affording due opportunity of being heard to the assessee company. Thus, grounds of appeal no.1 and 2 stands partly allowed for statistical purposes. 10. Grounds of appeal no.5 and 6 challenge the directions of the Hon’ble DRP disallowing the loss on foreign exchange variation by holding to be capital. The ld. AR contended that the loss on account of fluctuation foreign currency rate on ECB loan should be allowed as revenue deduction in irrespective of for what purpose the loan was utilized having regard to the provisions of section 43AA of the Act and the Accounting Standard 11 issued by the Institute of Chartered Accountant of India.

be capitalized in order to determine the actual cost under the provisions of section 43A(1) of the Act. The Co-ordinate Bench of the Tribunal in the case of Aesseal India Pvt. Ltd. vs. ITO in ITA No.2202/PUN/2017 order dated 29.10.2020 where one of us is party i.e. Accountant Member had dealt with the same issue by holding as under :- “10. The next issue which comes up for our consideration is whether or not the increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual costs in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. The Hon’ble Supreme Court in the case of CIT vs. Arvind Mills Ltd., 193 ITR 255 had categorically held that the adjustments in the actual cost on account of increase or decrease in liability in the repayment of foreign loan should be taken into account. The Parliament had enacted the provisions of section 43A of the Act w.e.f. 4.1.1967 to provide for adjustments in the actual cost of the assets pursuant to change in the foreign currency exchange rate. The Institute of Chartered Accountant of India had also issued Accounting Standard-11 which also provides for adjustments in carrying cost of the fixed asset acquired in foreign currency due to foreign exchange fluctuation in each balance sheet. Thus, the unamended provisions of section 43A of the Act provides for the adjustment has to be carried out in the actual cost of the assets on account of change in the rate of exchange. The provisions of section 43A of the Act were amended by the Finance Act, 2002 w.e.f. 1.4.2003 to provide that for making the necessary adjustments in the carrying cost of the fixed asset there should be actual cost, on increase or decrease of liability as a consequence of exchange variation infact actual payment of liability. But on plain reading of the provisions of section 43A of the Act, it is clear that provisions of section 43A have application only in the case of imported assets. In the present case, the assets were acquired in India, therefore, the conditions of making actual repayment foreign currency loan is not a condition for making necessary adjustment in the actual cost of the asset. Therefore, the general principles of law would be applicable. The Hon’ble Supreme Court in the case of Arvind Mills Ltd. (supra) observed as under :- “We may now turn to the second question posed earlier and consider the position on general principles. So far as depreciation allowance is concerned, the position is perhaps a little simpler because it is a recurrent claim. Under the definitions contained in section 32 read with section 43(1) and (6) of the Income tax Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist, and for the Income tax Officer to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost. Thus, in the illustration given earlier, if the asset is one that earns depreciation at 10%, the assessee would have got a depreciation allowance of Rs. 10,000 for the assessment year 1966-67 and that will stand. But, for

the assessment year 1967-68, the depreciation allowance will be calculated on an actual cost of Rs. 1,20,000 minus the depreciation earlier allowed of Rs. 10,000, i.e., on Rs. 1,10,000. The written down value and allowances for subsequent years will be calculated on this footing. In other words, though the depreciation granted earlier will not be disturbed, the assessee will be able to get a higher amount of depreciation in subsequent years on the basis of the revised cost and there will be no problem.” 11. Even the Hon’ble Madras High Court in the case of Southern Asbestos Cement Ltd. vs. CIT, 259 ITR 631 had also followed the Hon’ble Supreme Court’s decision in the case of Arvind Mills Ltd. (supra) and in the light of the law laid down by the Hon’ble Supreme Court in the case of Arvind Mills Ltd. (supra), we hold that the necessary adjustments should be made to the actual cost of assets on account of loss consequent to foreign currency fluctuation rate as there is no dispute that ECB loans are utilized for the purpose of acquisition of asset in India. Accordingly, we direct the Assessing Officer to allow necessary adjustment to the actual cost of the asset. Accordingly, this ground of appeal no.3 is allowed.” 14. Thus, in the light of the above decision, we direct the Assessing Officer to allow the capitalization of the loss on account of foreign exchange variation for the purpose of determining the actual cost of the fixed asset acquired out of the ECB loan u/s 43A(1) of the Act. Thus, the grounds of appeal no.5 and 6 stands dismissed and the additional ground of appeal no.3 stands allowed. 15. The additional grounds of appeal no.1 challenges that the TP adjustment should be confined to be AE’s transactions alone. It is settled position of law that the Transfer Pricing adjustment ought to be restricted only international transaction not the entity level. It is settled position of law that the TP adjustment, if any, should be restricted to the AE’s transactions alone not the entity level. In view of the settled position of law, we remand this issue back to the file of the Assessing Officer to restrict the TP adjustment, if any, only to the extent of international transactions. Thus, this additional ground of appeal no.1 stands partly allowed.