IN INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER I.T.A. Nos. 311 Mds/2013 & 2915/Mds/2014 Assessment year : 2004-05 & 2008-2009 Deputy Commissioner of Vs. M/s. Ashok Leyland Limited, Income Tax, No.1, Sardar Patel Road, Large Taxpayer Unit, Guindy, Chennai 600 034. Chennai 600 032. I.T.A. No. 160/Mds/2013 Assessment year : 2004-05 M/s. Ashok Leyland Limited, Vs. Deputy Commissioner of No.1, Sardar Patel Road, Income Tax, Guindy, Large Taxpayer Unit, Chennai 600 032. Chennai 600 034 [PAN AAACA 4651L ] ( /Appellant) ( Respondent) Assessee by : Shri. Vikran Vijayaraghavan, Adv Department by : Shri. Durai Pandian, IRS, JCIT. Date of Hearing : 10-08-2016 Date of Pronouncement : 20-10-2016 :- 2 -: ITA Nos.160 & 311/13 and 2915/14 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: These appeals filed by Department and Assessee are directed against different orders of Commissioner of Income-tax (Appeals), Chennai for above assessment years. Since issue involved in these appeals are common in nature, these appeals are combined, heard together, and disposed of by this order for sake of convenience. 2. First, we take up Department appeal in ITA No.311/Mds/2013 of assessment year 2004-2005 for adjudication:- 3. first ground raised by Revenue is that ld. Commissioner of Income Tax (Appeals) erred in treating loss arising out of write off of shares held by assessee in Ashok Leyland Investment Services Ltd as capital loss. 3.1 brief facts of issue are that assessee was holding 7,20,000 shares (of 10 each) in M/s. Ashok Layland Investment Services Ltd ( In short ALISL ). Since ALISL went into liquidation, assessee wrote off shares held in ALISL and claimed same as capital loss. Assessing Officer Assessing Officer observed that as :- 3 -: ITA Nos.160 & 311/13 and 2915/14 per sec.46 of Act distribution of assets on liquidation will not amount to transfer and hence question of capital loss does not arise. Accordingly Assessing Officer disallowed assessee's claim. Aggrieved by order, assessee filed appeal before Commissioner of Income Tax (Appeals). 3.2 In appellate proceedings, ld. Commissioner of Income Tax (Appeals) observed that Chennai bench of ITAT in case of M/s. Ashley Holdings Ltd vs. ACIT in ITA No.744/Mds/2009, dated 11.07.2011, held that assessee is entitled for allowance of capital loss resulting from shares held in ALISL which went into liquidation. In this case, M/s. Ashley Holdings was holding 7,20,000 shares (costing 2,05,02,000/-) in M/s. Ashok Leyland Investment Services Ltd. When ALISL went into liquidation, M/s. Ashok Holdings Ltd claimed same as capital loss resulting from shares held in ALISL which went into liquidation. Commissioner of Income Tax (Appeals) placing reliance on decision of Tribunal in case of M/s. Ashley Holdings Ltd (supra) held that assessee is entitled for allowance of capital loss resulting from :- 4 -: ITA Nos.160 & 311/13 and 2915/14 shares held in ALISL which went into liquidation and directed ld. Assessing Officer to allow same as allowable capital loss. Aggrieved by order, Revenue filed appeal before us. 3.3 We heard rival submissions, perused material on record and judicial decisions cited. Admittedly this issue was decided by Tribunal in case of M/s. Ashley holdings Ltd vs. ACIT in ITA No.744/Mds/2009, dated 11.07.2011 wherein held that assessee is entitled for allowance of capital loss resulting from shares held in other companies which went into liquidation. Being so, we are of opinion that ld. Commissioner of Income Tax (Appeals) not committed any error by following binding decision of Tribunal in case of M/s. Ashley holdings Ltd (supra). ground raised by Revenue in this appeal is dismissed. 3.4 In result, appeal of Revenue in ITA No.311/Mds/2013 of assessment year 2004-2005 is dismissed. 4. Now, we take up assessee appeal in ITA No.160/Mds/2013 of assessment year 2004-2005:- :- 5 -: ITA Nos.160 & 311/13 and 2915/14 4.1 first ground raised by assessee is that Commissioner of Income Tax (Appeals) erred in restricting rate of depreciation on certain buildings to 5%. 4.2 This issue came for consideration before this Tribunal for assessment year 2000-2001 in assessee own case in ITA No.2445/Mds/2005 wherein it was held as under:- 6.We have heard, parties at length. short controversy before us is that if assessee has provided residential flats to its employees, then at, what rate depreciation is to. be allowed. CIT(Appeals) has tried to interpret circular by stating that Board might have issued said circular in context of employees' quarters built in factory premises and not to. residential flats which are away from Factory. On perusal of CBDT Instructions/ letter, we. find that no such distinction is made. In our opinion, Circular/letter issued CBDT and relied on by learned counsel is in unambiguous language and no second interpretation is required. We, therefore, hold that Assessing Officer was not justified in restricting depreciation to 5% in respect of five residential flats which are used by employees of assessee company. We, therefore, allow ground No.2 in favour of assessee and on this issue set aside order of Commissioner of Income Tax (Appeals). Accordingly this ground is decided in favour of assessee. This ground is allowed. :- 6 -: ITA Nos.160 & 311/13 and 2915/14 5. next ground raised by assessee is that Commissioner of Income Tax (Appeals) is not justified in confirming reduction of 90% rent received and miscellaneous income from business profits. 5.1 This issue came for consideration before this Tribunal in ITA No.2835/Mds/2014 for assessment year 2004-05 in assessee s own case wherein it was held as under:-- 4.2 We have heard both parties, perused material on record and judicial decision cited. Supreme Court in case of ACG Associated Capsules (P) Ltd (cited supra) wherein held that ninety per cent of not gross rent or gross interest but only interest or net rent, which had been included in profits of business of assessee as computed under head Profits and gains of business or profession , was to be deducted under clause (1) of Explanation (baa) to Sec. 80HHC for determining profits of business. In view of above judgment 90% of net interest which have been included in profits of business of assessee under head income from business to be excluded for purpose of applying clause (1) to Explanation (baa) to Sec. 80HHC of Act. same is applicable in case of rent if rent payment is included as business expenditure of assessee. With these observations, we remit issue to file of ld. Assessing Officer for re- computation after giving opportunity to assessee. This ground of assessee is partly allowed for statistical purpose . :- 7 -: ITA Nos.160 & 311/13 and 2915/14 Accordingly, this issue is remitted back to file of ld. Assessing Officer for fresh consideration. 6. last ground raised by assessee is that Commissioner of Income Tax (Appeals) is not justified in deciding that each of International transaction is to be determined separately and independently. 6.1 Brief facts of case are that Assessing Officer found that there is adjustment made by Transfer Pricing Officer to ALP of assessee's international transactions. Transfer Pricing Officer vide his order CR No.44/TPO-1/AY.2004-05 dated 19.12.2006 found that there is variation in price of sales made to associated enterprises and sales made to third parties, and difference is in excess of permissible limits of + or - 5%. Hence, Transfer Pricing Officer determined ALP based on CUP method and made adjustment to ALP at Rs.14,32,677 /--. contents of order of Transfer Pricing Officer u/s.92CA(3) of Act are as under: assessee has worked out difference in price between sales made to associated enterprise and :- 8 -: ITA Nos.160 & 311/13 and 2915/14 third party price, wherein price variation is noticed on certain occasions and price variation in excess of 5% alone is considered for adjustment. difference in price variation on one to one comparison in excess of 5% has to be considered for necessary adjustment in price. It may also be mentioned that specific Law such as Income Tax Act overwrites of provision of General Clauses Act, until otherwise specifically provided. Therefore, assessee's submissions are rejected. price variation of 14,32,677/- is adjusted to make value of exports at Arms Length Price as under: Value of Sales as admitted by assessee on Column in page No. 4) 36,68,26,651/- Add: Adjustment for price differences as indicated above 10,76,983/- ---------------- Arms Length Price now determined at 36,79,03,614/- ------------------ Value of Sales as admitted by assessee on Sale of chassis (Sl.Nos.4 & 5 of Tabular column in Page No.4) 20,75,57,023/- Add; Adjustment for price difference as indicated above 3,55,714/- ------------------ Arms Length Price now determined at 20,79,12,737/- ------------------ - Hence, ld. Assessing Officer accordingly adjust upwardly total income of assessee by 14,32,677/- in accordance with subsection of Sec. 92C of Act after giving opportunity to assessee. :- 9 -: ITA Nos.160 & 311/13 and 2915/14 Aggrieved by order, assessee filed appeal before Commissioner of Income Tax (Appeals). 6.2 In appellate proceedings, ld. Commissioner of Income Tax (Appeals) observed value of sale transactions made by assessee to its associated enterprises and sale prices of third party transactions and application of CUP method for purpose of determination of ALP are not under dispute. only dispute is with respect to determination of ALP in respect of each of transaction or in respect of total of all transactions, especially when applying permitted margin of + or - 5%. There are clear instances of CUPs in this case. Hence CUP method is most appropriate method of determining ALP. Further, each transaction has clear cup. In such cases, ALP of each transaction is to be determined separately and independently. Since method followed is CUP and comparable becomes only one. Thus, there are no multiple (i.e. more than one) prices available / determined. In such case adopting arithmetic mean of 'more than one price determined' will not arise. Hence provisions of proviso to sub-sec.(2) of :- 10 -: ITA Nos.160 & 311/13 and 2915/14 sec.92C are not applicable in instant case. Since there is only one price is available in instant case, question of adopting arithmetic mean will not arise. Further, when only one price (CUP) is available for each of international transaction, same amounts to ALP. In such cases, application of + or - 5% margin is not at all required. For this purpose reliance is placed on decision of Hyderabad bench of ITAT in case of DCIT v. Deloitte Consulting India P Ltd (in ITA No.1082/Hyd/2010 dated 22.07.2011). provisions is clear that ALP of each of international transaction is to be determined separately and independently. Once, as per Act itself, ALP of each of international transactions with associate enterprises is to be determined, permissible tolerance of + or - 5% is also with reference to each of international transaction only. It will be highly improbable if permissible tolerance of + or - 5% is to be worked out with reference to sum total of ALPs of all international transactions. ALP of international transaction is to be determined with reference to prevailing market conditions existing as on that date, especially when CUP method is adopted. Therefore, assessee's argument :- 11 -: ITA Nos.160 & 311/13 and 2915/14 that permissible tolerance of + or - 5% is to be worked out with reference to sum total of ALPs of all international transactions, is totally unfounded and not as per spirits of provisions of statutes. Hence action of Assessing Officer in determining ALP of each of international transaction separately and working out of + or - 5% permissible / tolerance limits with reference to individual ALPs of international transactions is justified and confirmed. Against this assessee filed appeal before Tribunal. 6.3. We heard rival submissions, perused material on record and judicial decisions cited. Assessee placed reliance on order of Co-ordinate Bench in case of Mainetti India Pvt. Ltd vs. ACIT in ITA No.1789/Mds/2011 & ITA No.2074/Mds/2012 dated 16.03.2012 where Co-ordinate Bench held as under:- 12. We have heard submissions of both parties and have perused orders of authorities below as well as order of Tribunal relied upon by Ld. A.R. We find that issue in hand has already been dealt with by Tribunal in case of assessee in ITA No.1789/Mds./11 decided on 16.03.12. findings of Tribunal are reproduced herein under:- 8. We have considered rival submissions. Perusal of provisions of Sec.92C shows that words used is in relation to international transaction - - - - - - :- 12 -: ITA Nos.160 & 311/13 and 2915/14 having regard to nature of transaction or class of transaction or class of associated persons or functions performed by such persons . term class of transaction and nature of transactions come to forefront in present case. In assessee s case, transaction with AE is not one of simple purchase or simple sale. assessee purchases from one and sells to another. 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 sales made by assessee, transaction with Bangaladesh is in positive, transaction with Egypt is in negative, transaction with Gulf is in positive, transaction with Hongkong is in negative, transaction with Korea is in positive, transaction with Srilanka is in negative, transaction with Malayasia is in negative, transaction with Pakistan is in negative, transaction with Taiwan is in negative and transaction with UK is in negative. Thus, what is noticed is that on purchase assessee has positive differential i.e. assessee purchases at lower price from its AE than non-AE and when its sales to AE, its selling price is lower than selling price as compared with non-AE. There is no question that assessee is generating profits from transaction. There is no dispute that assessee is also paying taxes on profits that it has generated from its transaction of purchase and sale with its AE. assessee, thus it is noticed, is doing 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 mark up done by assessee. These transactions clearly show that what is done by assessee is one of purchase and sale. With this in mind reading of provisions of Sec.92C shows that word used is nature of transaction . nature of transaction would be particular set of transaction, which are to be seen together. When assessee is buying from one place and selling at another that would be class of transaction . When assessee is doing business of trading, it would not be right to hold that purchase is one class of transaction and sales are another class of transaction . assessee dealing with AEs is better position to negotiate better prices and consequently would be able to get better bargain. Here, what is to be seen is whether :- 13 -: ITA Nos.160 & 311/13 and 2915/14 transaction of purchase and sale being nature of transactions, when seen in consolidated from, generates profits which normally would be generated. For this both purchase and sale transactions would have to be considered. To explain by example, assessee purchases product at `10 from its AE. same product is sold by non-AE at `12/-. assessee sells finished product to its AE at `15/-. same finished product is sold by non-AE at `17/-. profits from both transactions, assessee to AE, as also non-AE to non- AE would give `5/- But for purpose of determining ALP as assessee purchases from its AE at price lower than non-AE, purchase price would be accepted as deviation is negative i.e. `10/- is lower than `12/-, but as assessee sells to its AE at price lower than non-AE, sale price will be adjusted to selling price of non-AE as deviation is positive i.e. `15/- is lower than `17/-. Therefore, `17/- will be considered as ALP. This would result in i) assessee buys from AE at `10/- (ii) assessee s sale price is adjusted to ALP at `17/-. Thus profit of assessee will be determined at `7/-. Now if we compare 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 profitability if considered without considering positive deviations would lead to impossible profitability positions, which is not what is contemplated under provisions of 92C. In circumstances, Assessing Officer is directed to re-compute ALP by taking into consideration both net difference on sale from AE and purchase from AE. Assessing Officer may look into fact as to margins of profits in regard to transactions done by assessee with its AE, as also non-AE transactions and then compute adjustment of ALP, if any. In circumstances, grounds Nos.5, 6, 8 & 9 of assessee stand partly allowed for statistical purposes. Respectfully following order of Co-ordinate Bench of this Tribunal, this ground of appeal of assessee is allowed for statistical purposes with similar directions to Assessing Officer . :- 14 -: ITA Nos.160 & 311/13 and 2915/14 This ground of assessee is partly allowed for statistical purpose. 7. In result, appeal of assessee in ITA No.160/Mds/2013 is partly allowed for statistical purpose. 8. Now we take up Revenue appeal in ITA No.2915/Mds/2014 of assessment year 2008-2009:- first ground raised by Revenue is that ld. Commissioner of Income Tax (Appeals) erred in directing Assessing Officer to considered interest expenditure of 18,77,03,235/- as against interest expenditure of 68,81,90,000/- considered by Assessing Officer for purpose of disallowance u/s.14A r.w. r 8D(2)(ii) of Income Tax Act. 8.1 After hearing both parties, this issue came for consideration in assessee s own case for assessment year 2006- 2007 in ITA No.2086/Mds/2010, dated 16.02.2016 wherein it was held as under:- 8.4 We heard rival submissions and perused material on record and judicial decisions cited. ld. Authorised Representative submitted that assessee is in receipt of exempted income and no expenditure has been incurred for earning income. In assessee s own case Co-ordinate Bench of :- 15 -: ITA Nos.160 & 311/13 and 2915/14 Tribunal has considered 2% disallowance of exempted income u/s.14A of Act. action of Assessing Officer applying Rule 8D is not correct as provisions of Rule 8D are introduced effective from 24.03.2008 and applicable from assessment year 2008-09 and we rely on decision of Jurisdictional High Court in case of Simpson and Co. Ltd. v. DCIT in Tax Case (Appeal) No.2621 of 2006 dated 15.10.2012 and direct Assessing Officer to disallow 2% of exempt income as disallowance u/s.14A of Act. This ground of assessee is partly allowed. Accordingly, this ground is allowed. 9. second ground raised by Revenue is that ld. Commissioner of Income Tax (Appeals) erred in directing Assessing Officer to allow wealth tax paid in respect of business assets as expenditure. 9.1 After hearing both parties, this issue came for consideration in assessee s own case for assessment year 2006- 2007 in ITA No.2086/Mds/2010, dated 16.02.2016 wherein it was held as under:- 9.2 On appeal before Tribunal, ld. Authorised Representative reiterated his submissions and relied on grounds of appeal and argued that Wealth Tax paid on business assets should be allowed. arguments of ld. Authorised Representative are not convincing and provisions are very clear u/s.40(iia) as any sum paid on account of Wealth Tax is not deductable. Considering apparent facts, we confirm :- 16 -: ITA Nos.160 & 311/13 and 2915/14 disallowance of Assessing Officer and dismiss assessee ground . Accordingly this ground of Revenue is allowed. 10. third ground raised by Revenue is that ld. Commissioner of Income Tax (Appeals) erred in deleting addition of 15,94,32,297/- made by ld. Assessing Officer on protective basis on account of exchange fluctuation loss by way of FCCN, considering inconsistence stand of assessee. 10.1 assessee claimed exchange loss on Foreign Currency Convertible Notes(FCCN) of 15,94,32,297/-. Assessing Officer , in assessment order, stated that assessee had claimed loss of 15,94,32,2971- on account of exchange fluctuation on account of FCCN. It is significant to note that assessee had claimed exchange gain on FCCN as not taxable in earlier years. Assessing Officers had held gain on account of FCCN proceeds as revenue income. AO held that it is illogical on part of assessee to claim gain as capital receipt and loss as revenue outgo. ld. Assessing Officer disallowed 15,94,32,297/-. Against this, assessee is in appeal before ld. Commissioner of Income Tax (Appeals). :- 17 -: ITA Nos.160 & 311/13 and 2915/14 10.2. In appellate proceedings, ld. Authorised Representative that ld. Assessing Officer wrongly considered that entire 15,94,32,297/- pertains to exchange fluctuation loss by way of FCCN. breakup of exchange loss of 15,94,32,297/- is given as under:- Particulars Amount Reinstatement of export Creditors and Debtors 3,58,58,832 Reinstatement of Fixed Deposits made out of FCCN proceeds 38,70,715 Reinstatement of Loans given to Associate Companies 11,97,92,750 Total 15,94,32,297 ld. AR further submitted that it was clear that 38,70,715/-- can be considered as capital as per Assessing Officer and hence, based on ld. Assessing Officer contention protective addition has to be 38,70,715/- only. ld. Commissioner of Income Tax (Appeals) observed that ld. Assessing Officer has rightly observed by AO in earlier years assessee has not offered to tax capital gain arisen out of exchange fluctuation from FCCN treating it as capital receipt. loss arisen out of foreign exchange fluctuation during present assessment year from FCCN is not offered to tax.' There is inconsistency in stand taken by assessee ld. Assessing Officer having taken stand that foreign exchange gain 'derived in earlier years as :- 18 -: ITA Nos.160 & 311/13 and 2915/14 revenue receipt and taxable, he has to allow loss arisen out of foreign exchange fluctuation as expenditure in view of decision taken by Hon'ble Supreme Court in case of Woodward Governor India Ltd (312 ITR 254). With regard to exact amount of such loss, assessee has submitted details durinq course of appeal proceedings as per which only 38,70,715 /- appear to be exchange fluctuation loss out of FCCN. However, Assessing Officer is directed to verify details and allow loss arisen out of exchange fluctuation as expenditure and ld. Commissioner of Income Tax (Appeals) partly allowed ground. Against this, Revenue is in appeal before us. 10.3 We heard rival submissions, perused material on record and judicial decisions cited. ld. Authorised Representative strongly placed reliance on following judgments:- (i) CIT vs. Woodward Governor 312 ITR 254. (ii) EID Parrys Ltd. vs. CIT 174 ITR 11. In our opinion these judgments cannot be applied to facts of case, as additional liability resulting on account of foreign exchange fluctuation in respect of foreign currency convertible notes cannot be :- 19 -: ITA Nos.160 & 311/13 and 2915/14 considered as capital loss. In our view, loss on account of exchange fluctuation is in field of Revenue if fund arising from Foreign Currency Convertible Notes used for purpose of working capital purpose. On other hand, fund raised through Foreign Currency Convertible Notes used for acquisition of fixed asset, it should be in capital field. Mere agreements is not enough to conclude that Foreign Currency Convertible Notes in question were obtained for acquiring current assets/capital assets. In our opinion, this is to be examined by ld. Assessing Officer in light of order of Special Bench in case of Oil & Natural Gas Corporation Ltd vs. DCIT 83 ITD 151 (Del)(SP). According this issue is remitted back to file of ld. Assessing Officer for fresh consideration. 11. fourth ground raised by Revenue is that ld. Commissioner of Income Tax (Appeals) erred in directing ld. Assessing Officer to allow depreciation @60% on UPS. 11.1 After hearing both sides, we are of opinion that similar issue came before this Tribunal in assessee s own case for assessment year 2006-2007 in ITA No.2086/Mds/2010 dated 16.02.2016 wherein held as under:- :- 20 -: ITA Nos.160 & 311/13 and 2915/14 12.4 We have heard submissions, perused material on record. claim of assessee UPS is energy saving device and alternative claim that it is integral part of computer cannot fit into block. UPS system is only supporting system and is like other plant and machinery and has separate identity on its own. Therefore, we follow co-ordinate bench decision of Tribunal and allow deprecation 25% only and accordingly appeal is partly allowed. This ground of Revenue is partly allowed. 12. last ground raised by Revenue is that ld. Commissioner of Income Tax (Appeals) erred in holding that provisions of Sec. 40(a)(i) are not applicable in respect of income accrued to non- residents on conversation of foreign currency convertible notes (FCCN) and deleting additions of 8,84,07,000/-. 12.1 After hearing both sides, we are of opinion that similar issue came before this Tribunal in assessee s own case for assessment year 2006-2007 in ITA No.2826/Mds/2014 dated 23.09.2016 wherein held as under:- 43.3 We heard rival submissions and perused material on record. Plain reading of Sec.47(x) r.w.s. 49(2A) of Act does not specify transfer on conversion of FCCN to shares and it cannot be said that assessee incurred any expenditure so as to deduct TDS u/s.40(a)(i) of Act and accordingly, deletion by Commissioner of Income :- 21 -: ITA Nos.160 & 311/13 and 2915/14 Tax (Appeals) is justified. This ground of Revenue is rejected. ground of Revenue is dismissed. 13. In result, appeal of assessee and Revenue in ITA No.160/Mds/2013 and ITA No.2915/Mds/2014 is partly allowed for statistical purpose and in ITA No. 311/2013 of Revenue s appeal is dismissed. Order pronounced on Thursday, 20th day of October, 2016, at Chennai. Sd/- Sd/- (DUVVURU RL REDDY) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 20.10.2016 KV Copy to: 1. /Appellant 3. CIT(A) 5. DR 2. Respondent 4. CIT 6. GF Deputy Commissioner of Income Tax, Large Taxpayer Unit, Chennai v. M/s. Ashok Leyland Limited