TVS Motor Company Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1153/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7958 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 28-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 28-04-2016
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Additional depreciation; Earning of tax free income; Permanent establishment; Question of law; Cost of acquisition; Speculation loss; Non compliance; Commercial expediency; Condonation of delay; Revenue expenditure; Capital expenditure
• Section: 92B; 14A; 37(1); 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO. 1153/MDS./2016 / ASSESSMENT YEAR :2011-12 M/S.TVS MOTOR COMPANY LTD., JAYALAKSHMI ESTATE, NO.29,(OLD NO.8) HADDOWS ROAD, CHENNAI 600 006. VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY RANGE III, CHENNAI 600 034. [PAN AAACS 7032 B ] ( $% / APPELLANT) ( &'$% /RESPONDENT) ./ I.T.A.NO. 1183/MDS./2016 / ASSESSMENT YEAR :2011-12 ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY RANGE III, CHENNAI 600 034. VS. M/S.TVS MOTOR COMPANY LTD., JAYALAKSHMI ESTATE, NO.29,(OLD NO.8) HADDOWS ROAD, CHENNAI 600 006. [PAN AAACS 7032 B ] ( $% / APPELLANT) ( &'$% /RESPONDENT) ASSESSEE BY : MR.VIKRAM VIJAYARAGHAVAN, ADVOCATE REVENUE BY : MR.SRINIVASA RAO, CIT, D.R / DATE OF HEARING : 28 - 0 9 - 201 6 / DATE OF PRONOUNCEMENT : 30 - 11 - 2016 ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 2 -: ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS ARE AGAINST THE ORDER OF THE LD. ASSESSING OFFICER DATED 25.02.2016 CONSEQUENT TO TH E DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) ISSUED U/S.143(3) R. W.S. 92CA(4) AND 144C(1) OF THE ACT DATED 25.12.2015 FOR ASSESSMENT YEAR 2011-12. FIRST, LET US TAKE UP ASSESSEE S APPEAL IN ITA N O.1153/MDS./2016 AS UNDER : 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO TRANSFER PRICING (TP) ADJUSTMENT ON PAYMENT OF CORPORATE FEE OBSERVING IT AS AN INTERNATIONAL TRANSACTION. 3. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAD GI VEN CERTAIN CORPORATE GUARANTEE (AMOUNTING TO RS 53.88 CRORES/ LETTER OF COMFORT RS 10.57 CRORES) TO THE BANKS/AES FOR THE LOANS BORROW ED BY THE AES WITHOUT CHARGE ANY FEE AND, HAVING REGARD TO BUSINESS AND E CONOMIC CIRCUMSTANCES, THE PROVISION OF SUCH GUARANTEE WAS CONSIDERED TO B E AT ARMS LENGTH. THE TPO HOWEVER, HELD THAT IF THERE IS AN EXPLICIT GUAR ANTEE THEN, UNDER OECD GUIDELINES, INTEREST CAN BE IMPUTED. THE MAIN ARGUM ENT OF THE TPO IN IMPUTING AN ARMS LENGTH FEE IS THAT, BY OBTAINING GUARANTEE FROM TAXPAYER, THE AES CREDIT RATING ALMOST EQUALS TO THAT OF THE TAXPAYER AND THUS THERE IS BENEFIT TO THE AE IN TERMS OF INTEREST RATE AS WELL . THUS AT ARMS LENGTH, COMPENSATION IS REQUIRED TO BE IMPUTED. ACCORDINGLY , THE TPO HAS IMPUTED A ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 3 -: GUARANTEE FEE OF 2% ADOPTING THE COMMISSION CHARGED BY BANKS TO SIMILAR ENTITIES. 3.1 THE ASSESSEE AGGRIEVED THIS TREATMENT BY THE TPO, WENT BEFORE DRP AND SUBMITTED THAT THOUGH THE GUARANTEE TRANSACTION IS TREATED AS AN INTERNATIONAL TRANSACTION IN VIEW OF THE AMENDED LA W UNDER FINANCE ACT 2012, IT DOES NOT QUALIFY AS AN INTRA-GROUP SERVICE , HENCE NO FEE IS REQUIRED TO BE CHARGED IT WAS CLAIMED THAT THE CORPORATE GUA RANTEE PROVIDED BY THE ASSESSEE ON BEHALF OF ITS AE IS IN THE NATURE OF SH AREHOLDER ACTIVITY AND DOES NOT WARRANT A FEE TO BE CHARGED BY THE ASSESSEE VAR IOUS CASE LAWS WERE RELIED UPON BY THE ASSESSEE. 3.2 THE DRP OBSERVED THAT THE FINANCE ACT 2012 WHI CH INSERTED THE EXPLANATION BELOW SECTION 92B WITH RETROSPECTIVE EF FECT FROM 01042002 CLAUSE (C) OF EXPLANATION (I) READS AS FOLLOWS CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TER M OR SHORT-TERM BORROWING, LENDING, OR GUARANTEE, PURCHA SE OR SALE OF MARKETABLE SECURITIES OR ANY TYPE OF ADVANC E, PAYMENTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY O THER DEBT ARISING DURING THE COURSE OF BUSINESS. IT WAS OBSERVED THAT ANY ENTITY WHICH PROVIDES CORP ORATE GUARANTEE TO A LENDER AGAINST LOANS TAKEN BY A BORROWER WILL CHARG E A REASONABLE FEE FOR THE INHERENT RISK IN THE TRANSACTION, SINCE IT IS BURDE NED WITH AN OBLIGATION UNDER THE GUARANTEE ARRANGEMENT TO PAY THE SUM TO THE LEN DER IF THE BORROWER, WHICH IN THAT CASE IS THE AE, DEFAULTS ON THE REPAY MENT OF THE LOAN. THE TPO THEREFORE, HAS ACTED WITHIN THE BOUNDS OF LAW AND R EASONABLENESS BY ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 4 -: CONSIDERING THE CORPORATE GUARANTEE TRANSACTION AS A INTERNATIONAL TRANSACTION WHICH HAS TO BE ANALYSED WITH REGARD TO ARMS LENGTH PRICE AN TERMS OF SECTION 92. 3.3 ACCORDING TO DRP, THE ASSESSEES ARGUMENT THAT THE TRANSACTION WAS IN THE NATURE OF A SHAREHOLDER ACTIVITY CANNOT BE A CCEPTED SINCE IT QUALIFIES AS AN INTERNATIONAL TRANSACTION BETWEEN CLOSE BUSIN ESS ASSOCIATES WHICH PROVIDES A VALUABLE COMMODITY IN THE FORMS OF TAXPA YERS CREDIT RATING WHICH BENEFITS THE AE IN TERMS OF INTEREST RATES COMPENSA TION, THEREFORE, WAS REASONABLY REQUIRED TO BE IMPUTED AT ARMS LENGTH. THE TRANSACTION DOES NOT FALL WITHIN THE SCOPE OF SHARE HOLDER ACTIVITIES WH ICH HAVE BEEN BROADLY OUTLINED BY THE OECD AND DO NOT CONTAIN ANY ITEM SI MILAR TO THE IMPUGNED TRANSACTION. AS FAR AS THE ARGUMENT OF CORPORATE GU ARANTEE RECEIVED BY THE TAXPAYER IS CONCERNED THE SAME CARRIES MERIT. THE D RP ON THIS ISSUE DIRECTED THE TPO TO PROVIDE ADJUSTMENT FOR THE VALUE OF CORP ORATE GUARANTEES RECEIVED BY THE ASSESSEE FROM AFTER VERIFICATION OF INDIVIDUAL TRANSACTIONS. 3.4 ON THE OBJECTION REGARDING THE RATE OF GUARANT EE FEE APPLIED BY THE TPO AT 2% THE TAXPAYERS OBJECTION WAS NOT BE ACCEP TED BY DRP SINCE THE TPO HAS PROVIDED RATIONAL BASIS BY TAKING INTO ACCO UNT GUARANTEE COMMISSION CHARGED BY SCHEDULED BANKS WHEN THEY PRO VIDE SUCH GUARANTEES TO SIMILAR CREDITWORTHY ENTITIES AS THE AE OF THE T AXPAYER. THE PLEA OF LOWER RATES IS NOT ADMISSIBLE GIVEN THE INSUFFICIENCY OF DETAILS TO COMPUTE THE BENEFIT IN TERMS OF REDUCTION IN INTEREST RATES TO THE AE BY VIRTUE OF THE GUARANTEE GIVEN BY THE TAXPAYER. THE ASSESSEE HAS N OT DONE ANY SEPARATE TP STUDY FOR THE GUARANTEE COMMISSION DESPITE THE M ATTER BEING IN LITIGATION ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 5 -: FOR SEVERAL YEARS. WITHOUT TAKING THE FIRST AND MAN DATORY STEP THE ASSESSEE IS MERELY OBJECTING TO THE ADJUSTMENT MADE BY THE T PO. THE DRP OBSERVED THAT THE ACTION OF THE TPO IS JUSTIFIED AND THE CLA IM OF THE ASSESSEE COMPANY IS NOT ACCEPTABLE. CONSEQUENTLY, THE AO PASSED THE ORDER AS PER THE DIRECTION OF THE DRP. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY SIMILAR ISSUE WAS CONSIDERED BY THIS TRI BUNAL IN THE CASE OF REDINGTON (INDIA) LTD., VS. ACIT REPORTED IN (2015) 41 ITR (TRIB) 0646(CHENNAI) WHEREIN HELD THAT: 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE H AVE CAREFULLY GONE THROUGH THE DECISION OF THE DELHI BENCH OF THI S TRIBUNAL IN BHARTI AIRTEL LTD. [2014] 2 ITR (TRIB)-OL 475 (DELH I). THIS TRIBUNAL FOUND THAT THE CORPORATE GUARANTEE ISSUED FOR THE B ENEFIT OF THE ASSOCIATED ENTERPRISE DOES NOT INVOLVE ANY COST TO THE ASSESSEE AND DOES NOT HAVE ANY BEARING ON THE PROFIT, INCOME OR LOSS OF ASSETS OF THE ASSESSEE, THEREFORE, IT WAS OUTSIDE T HE AMBIT OF INTERNATIONAL TRANSACTION TO WHICH THE ARM'S LENGTH PRICE ADJUSTMENT CAN BE MADE. THE DISPUTE RESOLUTION PANE L HAS ALSO PLACED ITS RELIANCE ON THE EXPLANATION TO SECTION 9 2B OF THE ACT. THE DECISION OF THE DELHI BENCH OF THIS TRIBUNAL IN BHARTI AIRTEL LTD. [2014] 2 ITR (TRIB)-OL 475 (DELHI) WAS FOLLOWE D BY THE CHENNAI BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OW N CASE FOR THE ASSESSMENT YEAR 2009-10. 6. IN VIEW OF THE ABOVE, BY FOLLOWING THE ORDER OF THE DELHI BENCH OF THIS TRIBUNAL IN BHARTI AIRTEL LTD. [2014] 2 ITR (TRIB)-OL 475 (DELHI) AND THE ORDER OF THIS TRIBUNAL IN THE ASSES SEE'S OWN CASE FOR THE ASSESSMENT YEAR 2009-10 AND FOR THE REASONS STATED THEREIN, WE HOLD THAT THE CORPORATE GUARANTEE GIVEN BY THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 6 -: ASSESSEE TO ITS ASSOCIATED ENTERPRISE DOES NOT INVO LVE ANY COST TO THE ASSESSEE, THEREFORE, IT HAS NO BEARING ON THE P ROFITS, INCOME, LOSS OR ASSETS OF THE ASSESSEE AND OUTSIDE THE AMBI T OF INTERNATIONAL TRANSACTION TO WHICH THE ARM'S LENGTH PRICE ADJUSTMENT HAS TO BE MADE. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS. 1,84,17,371. 4.1 ACCORDINGLY, IN OUR OPINION, THE CORPORATE GUA RANTEE FEE PROVIDED BY THE ASSESSEE IN RESPECT OF LOAN TAKEN F ROM IFC AND EXTENDED LOC FOR WORKING CAPITAL FACILITY FROM SBI, INDONESIA TO THE AE. IT CANNOT FALL UNDER THE PURVIEW OF INTERNATIO NAL TRANSACTIONS IN TERMS OF SEC.92B OF THE ACT SO AS TO MAKE THE ADJUS TMENT. THE SIMILAR VIEW WAS TAKEN BY DELHI BENCH OF TRIBUNAL IN THE CA SE OF BHARTI AIRTEL LTD. VS. ACIT REPORTED IN 43 TAXMAN 150. IN VIEW O F THIS DECISION, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE A SSESSEE AND ACCORDINGLY THIS GROUND TAKEN BY THE ASSESSEE IS AL LOWED. 5. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD T O DIRECTION OF DRP THAT BRAND PROMOTION EXPENSES INCURRED BY THE A SSESSEE IN PROMOTING THE MARKET AS THE INTERNATIONAL TRANSACTI ONS AND THEREBY MAKING TP ADJUSTMENTS TO THE TUNE OF ` 11,64,30,765/-. 5.1 THE FACTS OF THE ISSUE ARE THAT THE BRAND PRO MOTION/MARKET DEVELOPMENT EXPENDITURE IN INDONESIA TO THE TUNE OF ` 10,93,77,742/- ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 7 -: WERE INCURRED BY CONTRACTING THE THIRD PARTY MADE A GENCIES DIRECTLY BY TVSM FOR ADVERTISING IN INDONESIA DIRECTLY. THE TP O OBSERVED THAT NO SUCH EXPENDITURE WAS INCURRED BY THE ASSESSEE IN AN Y OTHER COUNTRY EVEN THOUGH THE EXPORT FUNCTIONS/OTHER FUNCTIONS OF THE ASSESSEE AS WELL AS INDEPENDENT ENTERPRISES PLACED IN OTHER COU NTRIES AND THE AE ARE SAME. THE ASSESSEE HAD SUBMITTED THE PARTY WI SE BREAKUP OF THE ADVERTISEMENT AND SALES PROMOTION EXPENDITURE INCUR RED IN INDONESIA VIDE LETTER DATER DATED 16.12.2014 WHEREIN THE TOTA L AMOUNT OF ` 10,93,77,742/- IS DIRECTLY RELATED TO ADVERTISEMENT AND SALES PROMOTION EXPENDITURE INCURRED FOR THE INDONESIAN A E NAMELY PT TVS MOTOR COMPANY INDONESIA. TPO OBSERVED THAT IN THIS BACKGROUND, ANY EXCESS EXPENDITURE INCURRED TOWARDS MARKET ADVERTIS EMENT AND SALES PROMOTION SHOULD BE REIMBURSED BY AE ALONG WITH MAR KUP, HOWEVER THE SAME HAS NOT BEEN DONE. TPO ASKED THE ASSESSEE TO EXPLAIN VIDE LETTERS DATED 20.11.2014 AND 13.01.2015 AS TO WHY THE EXPENDITURE INCURRED FOR BRAND PROMOTION SHOULD NOT BE CONSIDER ED AS AN INTERNATIONAL TRANSACTION AND WAS ALSO REQUIRED TO STATE WHY THE SAID AMOUNT HAS NOT BEEN REIMBURSED BY AE AND ALSO TO CL ARIFY WHEY THE ALP HAS NOT TO BE CALCULATED ALONG WITH MARKUP FOR THE SERVICES RENDERED TOWARDS BRAND PROMOTION. 5.2 IN RESPONSE, THE ASSESSEE REPLIED THAT AMP EXP ENSES IS NOT AN INTERNATIONAL TRANSACTION FOR THE REASONS THAT T HERE IS NO EXPLICIT ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 8 -: TRANSACTION BETWEEN AES, TRANSACTION ENTERED WITH T HIRD PARTIES AND HIGHER PERCENTAGE OF ADVERTISEMENT EXPENDITURE INCU RRED BY PT TVS INDONESIA. FURTHER, THE TPO OBSERVED THAT AS PER P ROVISIONS OF SEC.92B(1), 92F(V) AND RULE 10B(2)(C), ARRANGEMENT BETWEEN TWO AES FOR ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBUT ION TO, ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION W ITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO A NY ONE OR MORE OF SUCH ENTERPRISES IS AN INTERNATIONAL TRANSACTION. I N THIS CASE, ADMITTEDLY, THE ASSESSEE HAS INCURRED THE COST OF A MP FOR THE BENEFITS OF ITS AE ACCORDINGLY AMP EXPENDITURE IS AN INTERNA TIONAL TRANSACTION U/S.92B(1) OF THE ACT. FURTHER, TPO OBSERVED THAT A PART FROM THIS, IN THE FINANCE ACT, 2012, AN EXPLANATION TO SEC.92B HA S BEEN INSERTED W.E.F.01.04.2002 WHICH HAS INCLUDED THE USE OF INT ANGIBLE PROPERTY UNDER THE DEFINITION OF INTERNATIONAL TRANSACTION . FINLAY, THE AO RELIED ON THE DECISION OF SPECIAL BENCH OF DELHI TRIBUNAL IN THE CASE OF M/S.L.G.ELECTRONICS INDIA PVT. LTD VS. ACIT IN ITA NO.5140/DEL./2011 AND OBSERVED THAT AMP EXPENDITURE INCURRED BY THE A SSESSEE AT INDONESIA IS LIABLE FOR TP ADJUSTMENT. ACCORDINGLY , HE MADE ADJUSTMENTS TOWARDS THIS AT ` 11,64,30,765/-, WHICH INCLUDED 9.15% TOWARDS MARKUP. THE DRP ALSO CONFIRMED IT. AGAINST THIS THE ASSESSEE IS IN APPEAL BEFORE US. ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 9 -: 6. BEFORE US, LD.A.R SUBMITTED THAT THE ASSESSEE IN 2011 HAD A LIMITED BRAND RECOGNITION AND PRESENCE IN THE INDONESIAN TW O WHEELER MARKET WHICH WAS LARGELY DOMINATED BY JAPANESE MANUFACTURE RS. THEREFORE, TO BUILD THE BRAND RECOGNITION AND PRESENCE IN THE INDONESIAN MARKET, THE COSTS RELATING TO BRAND PROMOTION WAS BORNE BY THE ASSESSEE DURING THE YEAR. FURTHER, HE SUBMITTED THAT THE TVS BRAND IS RELATIVELY NEW, HAS VERY LIMITED BRAND RECOGNITION, MARKET SHA RE AND CONSUMER RECALL IN THE INDONESIAN MARKET. M/S.PT TVS HAS NOT BENEFITTED FROM THE GOODWILL OF THE TVS BRAND. ACCORDING TO LD.A.R , THE BRAND BUILDING ACTIVITIES OF TVSM IS A SERVICE RENDERED TO THE AE AND WILL FALL UNDER THE AMBIT OF THE TERM INTERNATIONAL TRANSACTION. FURTHER, THE LD.A.R PLACED RELIANCE ON THE DELHI HIGH COURT JUDGEMENT I N THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. & OR S. VS. CIT (374 ITR 0118) WHEREIN HELD THAT DEVELOPMENT OF MARKET F OR A BRAND IS THE RESPONSIBILITY OF THE OWNER OF THE BRAND AND IF THE AE HAS INCURRED ANY EXPENSES FOR ANY SUCH ACTIVITIES, THEN IT SHOULD BE COMPENSATED BYTHE OWNER OF THE BRAND. NO INDEPENDENT PARTY WOULD BE W ILLING TO UNDERTAKE SUCH EXPENSES FOR A BRAND NOT OWNED BY IT . HENCE, LD.A.R SUBMITTED THAT THE ASSESSEE IN THE CAPACITY OF THE ECONOMIC OWNER OF THE BRAND HAS INCURRED BRAND BUILDING EXPENSES FOR BUILDING A STRONG FOOTHOLD IN THE INDONESIAN MARKET. FURTHER, THE LD .A.R SUBMITTED THAT THE ARRANGEMENT OF TVSM WITH NON-AES CANNOT BE COMP ARED WITH THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 10 - : BRAND PROMOTION EXPENSES INCURRED BY THE COMPANY IN INDONESIA AS THE BUSINESS MODEL AND THE MARKET CATERED TO IN THE SE TWO ARRANGEMENTS ARE COMPLETELY DIFFERENT. IN NON-AE C ASES, THE THIRD PARTY DEALERS INCURRED THE ADVERTISEMENT EXPENSES AND THE ASSESSEE COMPENSATE THEM FOR THE SAME. IN INDONESIA, TO GAIN ACCESS TO THIS HUGE MARKET, TVSM HAS SET UP ITS ONLY MANUFACTURING FACILITY OUTSIDE INDIA IN INDONESIA THROUGH ITS SUBSIDIARY PT TVS. THEREFORE, TO GAIN MARKET SHARE, THE ASSESSEE HAS TO MAKE THE PRESENCE OF ITS BRAND FELT IN THE INDONESIAN MARKET THROUGH PERFORMING BRAND P ROMOTIONAL ACTIVITIES ON ITS OWN AND THROUGH ITS SUBSIDIARY, P T TVS. GIVEN THIS DIFFERENCE IN THIS BUSINESS MODEL, THE LD.A.R SUBMI TTED THAT COMPARISON BETWEEN NON-AE ARRANGEMENT AND BRAND PROMOTION ACTI VITY IN THE INDONESIAN MARKET CANNOT BE COMPARED. FURTHER, THE LD.A.R SUBMITTED THAT TPO APPLIED BRIGHT LINE TEST (BLT) FOR MAKING AN ADJUSTMENT TO THE BRAND PROMOTION EXPENSES INCURRED BY THE ASSESS EE WHICH IS NOT CORRECT IN ACCORDANCE WITH THE PROVISIONS OF THE IN COME TAX ACT. FURTHER, LD.A.R RELIED ON THE JUDGEMENT OF DELHI HI GH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. VS. CIT IN [2016] 381 I TR 117 (DEL). 7. ON THE OTHER HAND, LD.D.R SUBMITTED THAT TVSM ( PRESENT ASSESSEE) HAD NOT INCURRED ANY AMP EXPENDITURE IN A NY OTHER COUNTRY WHERE THE SPARES AND VEHICLES WERE EXPORTED BY TVSM INDIA. HE SUBMITTED THAT TVSM INDIA IS EXPORT VEHICLES TO OTH ER COUNTRIES SUCH AS ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 11 - : BANGLADESH, HONG KONG, JAPAN, NEPAL, SINGAPORE AND SRI LANKA. TVSM INDIA HAS NOT INCURRED ANY AMP EXPENDITURE. IT MEA NS THAT DUE TO THE PRESENCE OF AE, PT TVS INDONESIA, THE ASSESSEE COMP ANY INCURRED HUGE AMOUNT AS AMP EXPENDITURE WHICH CLEARLY INDICA TES THAT TVSM INDIA IS A SERVICE PROVIDER IN RESPECT TO AMP EXPEN DITURE INCURRED IN INDONESIA. THUS, HE RELIED ON THE ORDER OF LOWER AU THORITIES. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, TVSM INDIA INCURRED A SUM OF ` 10,93,77,742/- TOWARDS ADVERTISEMENT AND MARKETING PROMOTION EXPEN SES DURING THE YEAR. THE ASSESSEE HAS TAKEN A PLEA THAT THIS EXPE NDITURE WAS INCURRED FOR MARKETING TVSM INDIA PRODUCTS AND CLAI M AS ITS OWN EXPENSES. THE AO CONSIDERED THIS EXPENDITURE ALONG WITH THE MARKUP AT 9.15% I.E. ` 97,60,352/- TOTALING AT ` 11,64,30,765/- SO AS TO MAKE TP ADJUSTMENTS TOWARDS AMP EXPENDITURE. THE ASSESSE ES CONTENTION IS THAT TVSM INDIA HAS INCURRED THIS AMP EXPENDITUR E TO PROMOTE TVS BRAND IN INDONESIA BEING ECONOMIC OWNER OF THE BRAN D. HOWEVER, THERE IS NO DOCUMENT BROUGHT ON RECORD TO SUGGEST T HAT ECONOMIC OWNERSHIP OF BRAND WAS VESTED WITH THE TVSM INDIA. ON THE OTHER HAND, PT TVS INDONESIA HAD DERIVED BENEFIT FROM THE EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS AMP AND ECONOMIC O WNERSHIP OF THE TVS BRAND INDONESIA VESTS WITH AE, PT TVS INDONESIA . IT IS ALSO BROUGHT ON RECORD BY THE TPO THAT AMP EXPENDITURE I NCURRED BY THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 12 - : PT TVS INDONESIA IS LESS THAN WHAT THE OTHER INDEPE NDENT LICENSED MANUFACTURER WOULD HAVE INCURRED IN INDONESIA, WHIC H IMPLIES THAT THE EXPENDITURES WHICH PT TVS INDONESIA OUGHT TO HAVE I NCURRED TOWARDS AMP WHICH WAS MET BY TVSM INDIA. IN OTHER WORDS, T VSM INDIA IS PROVIDING SERVICES TO DEVELOP TVS BRAND IN INDONESI A AND THE BENEFIT OF THAT DEVELOPMENT OF BRAND WOULD BE FETCHED BY PT TVS INDONESIA. FURTHER, TVS PRODUCT IS SOLD IN COUNTRY LIKE BANGL ADESH, HONG KONG, JAPAN, NEPAL, SINGAPORE AND SRI LANKA. IT MEANS TH AT DUE TO THE PRESENCE OF AE, PT TVS INDONESIA, THE ASSESSEE COMP ANY INCURRED HUGE AMOUNT AS AMP EXPENDITURE WHICH CLEARLY INDICA TES THAT TVSM INDIA IS A SERVICE PROVIDER IN RESPECT OF AMP EXPEN DITURE INCURRED IN INDONESIA. FURTHER, NOT ONLY TP ADJUSTMENT TO BE MA DE TOWARDS AMP EXPENDITURE, IT HAS TO BE MARK UP AS PER INDEPENDEN T SEARCH CONDUCTED BY THE TPO. THUS, THE LEGAL AND ECONOMIC OWNERSHIP OF THE BRAND OF TVS IN INDONESIA WAS EXPLOITED BY AE, PT T VS INDONESIA AND RISK ASSOCIATED WITH MARKETING DISTRIBUTION WAS TO BE BORNE BY PT TVS INDONESIA. THE AMP EXPENDITURE TO BE BORNE BY PT T VS INDONESIA ONLY AND THE TVSM INDIA IS NOT CONNECTED WITH THE S ALES OF THE AE, PT TVS INDONESIA. ALL THE RISKS ASSOCIATED WITH THE S ALES OF AES IS TO BE BORNE BY AE ONLY. IN SUCH CIRCUMSTANCES, ASSESSEE IS NOT REQUIRED TO INCUR ANY EXPENDITURE TOWARDS AMP. MORE SO, WHEN T HERE IS NO STIPULATION BY WAY OF ANY AGREEMENT BETWEEN THE ASS ESSEE AND THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 13 - : A.E, IT IS BORNE IN MIND THE ASSESSEE HAS SOLD SIMI LAR GOODS TO OTHER NON-AE, ASSESSEE WOULD NOT HAVE INCURRED SUCH EXPEN DITURE THE BENEFIT DERIVED FROM IMPUGNED EXPENDITURE IS NOT AT ALL FOR THE ASSESSEE AND IT GOES DIRECTLY TO THE AE ONLY. IN OU R OPINION, AMP EXPENDITURE INCURRED IN INDONESIA, THE BENEFIT ACCR UED TO ONLY AE AND ASSESSEE CANNOT CLAIM ANY SUCH EXPENDITURE AND THE AE IS IN DIFFERENT TAX JURISDICTION CONSTITUTED DISTINCT AND INDEPENDE NT ENTITY SUBJECT TO THE LAW OF THE INDONESIA AND TVSM IS A PARENT COMPA NY CANNOT BE CLAIMED THE BENEFIT OF THE A.ES BUSINESS OR MAY C LAIM BENEFICIAL OWNERSHIP TREATING THE A.E AS VIRTUAL NON ENTITIES . THIS VIEW IS SUPPORTED BY RECENT JUDGEMENT OF SUPREME COURT IN T HE CASE OF VODAPHONE INTERNATIONAL HOLDING VS. UOI IN (2012) 3 41 ITR 01. 8.1 FURTHER, AS HELD BY MUMBAI BENCH IN THE CASE OF STEAM INTERNATIONAL SERVICES PVT. LTD VS. ACIT REPORTED I N 141 ITD 492 THAT INVESTMENT OF EXPENDITURE TO AE IS VERY MUCH A TRA NSACTION AS PER SECTION 92F(V) AND CONSEQUENTLY IT IS A INTERNATION AL TRANSACTION AS PER SEC.92B OF THE ACT REQUIRING CONSIDERATION U/S.92 O F THE ACT. FURTHER, THE ARGUMENT OF THE ASSESSEE IS THAT PT TVS INDONES IA IS UNDER LOSSES AND HENCE NO TP ADJUSTMENT IS NECESSARY ON TRANSACT ION WHICH IS NOT TENABLE IN VIEW OF THE DECISION OF THE BANGALORE TR IBUNAL IN THE CASE OF ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 14 - : 24/7 CUSTOMER.COM PVT. LTD., IN 140 ITD 344 (BANGA LORE). ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS REJECTE D. 9. THE NEXT ISSUE IS WITH REGARD TO DISALLOWANCE U/ S.14A R.W.RULE 8D. 9.1 THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE H AS NOT MAINTAINED ANY SEPARATE ACCOUNTS IN REGARD TO THE I NVESTMENTS, THE INCOME FROM WHICH IS EXEMPT. FURTHER, THE INVESTME NTS WERE MADE IN THE PAST AND NO EXPENDITURE WAS INCURRED TO EARN EX EMPT INCOME FROM THESE INVESTMENTS IN THE RELEVANT FINANCIAL YEAR. T HE DRP OBSERVED THAT INVESTMENT DECISIONS ARE COMPLEX IN NATURE AND A COMPANY IS RUN BY ITS BOARD OF DIRECTORS AND THE BUSINESS AND INVE STMENTS ARE MANAGED BY ITS KEY MANAGEMENT PERSONNEL, EXECUTIVES , ETC FOR WHICH EXPERTS ARE OFTEN CONSULTED. FURTHER, THE DECISION AS WHERE TO INVEST AND HOW MUCH TO INVEST NECESSARILY INVOLVES CONSIDE RABLE TIME, EXPERTISE AND CONSEQUENTLY THE DECISION-MAKING HAS TO BE AT THE HIGHEST LEVELS. 9.2 ACCORDING TO DRP, THE MANDATE OF SECTION 14A REQUIRES THE ASSESSEE TO MAINTAIN PROPER BOOKS OF ACCOUNT IN REGARD TO TH E INVESTMENTS MADE FROM WHICH THE INCOME CAN ARISE, WHICH IS TAX-EXEMPT AND SUCH BOOKS OF ACCOUNTS BE PRODUCED BEFORE THE ASSESSING OFFICER TO ASCERTA IN THE EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TH E TOTAL INCOME OF THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 15 - : ASSESSEE. IN THE INSTANT CASE, THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE ACCOUNTS IN THIS REGARD. THIS PROVES THAT THE, ASSE SSEES CLAIM OF NOT INCURRING ANY EXPENDITURE IN RELATION TO THE TAX FR EE INCOME TO BE EARNED FROM ITS INVESTMENTS IS NOT SUPPORTED BY DOUMENTAR Y EVIDENCE AS MANDATED IN SECTION 14A(2)/(3) OF THE ACT. IN OTHER WORDS, UNDER THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSEE H AS NOT DISCBARG4 THE ONUS CAST UPON IT. 9.3 IN THE ABSENCE OF ACCOUNTS MAINTAINED BY THE A SSESSEE IN REGARD TO ITS INVESTMENTS, THE ASSESSING OFFICER CANNOT BE EX PECTED TO EXAMINE THE CLAIM OF THE ASSESSEE HAVING REGARD TO ITS ACCOUNTS . HOWEVER, SINCE THE INCURRENCE OF ESTABLISHMENT EXPENSES) OTHER ADMINIS TRATIVE AND GENERAL EXPENSES, ETC. CANNOT BE RULED OUT IN REGARD TO MAI NTAINING OF INVESTMENT PORTFOLIO COUPLED WITH FACT OF INVOLVEMENT OF KEY M ANAGEMENT PERSONNEL, EXPERTS, EXECUTIVES, OFFICIALS, ETC IN THE DECISION MAKING PROCESS AND MANAGEMENT OF INVESTMENT PORTFOLIO, THE ASSESSING O FFICER IS ABSOLUTELY CORRECT IN HIS COMING TO A CONCLUSION THAT CERTAIN COMMON EXPENSES WERE IPSO FACTO INCURRED BY THE ASSESSEE WHILE MANAGING ITS INVESTMENTS AND EARNING THE TAX FREE INCOME AND THE AO HAS ALSO RE CORDED HIS SATISFACTION IN THE ORDER 9.4 ON THIS ISSUE, THE AO OBSERVED THAT NO EXPENDI TURE HAD BEEN DEBITED BY THE ASSESSEE WITH REGARD TO THE INVESTMENTS THE AO HAS RECORDED HIS SATISFACTION IN THE ORDER. ACCORDINGLY, RULE 8D IN RESPECT OF THE ADMINISTRATIVE EXPENSES COVERED BY SUB RULE (2) CLA USE (III) WAS INVOKED AS PROVIDED UNDER THE SAID RULE AND DISALLOWANCE WAS M ADE UNDER THE SAID ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 16 - : SECTION NO EXPENDITURE DIRECTLY ATTRIBUTABLE OR IND IRECTLY ATTRIBUTABLE APART FROM THE SAID EXPENDITURE WAS DISALLOWED BY THE AO. THE DRP CAME TO A CONCLUSION THAT THERE IS HARDLY ANYTHING TO INFER, THAT THE LEGISLATURE INTENDED TO IMMUNE THE EXPENDITURE IN RELATION TO I NCIDENTAL EXEMPT INCOME FROM THE OPERATION OF SEC.14A. HENCE, THE DRP WAS OF THE OPINION THAT THE ACTION OF THE AO IS AS PER LAW. HOWEVER, INVESTMENT IN CASE OF FOREIGN COMPANIES IS TO BE EXCLUDED CONSIDERING THE DIVIDEN D THEREON IS TAXABLE. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILIR ISSUE CAME FOR CONSIDERATION BEFORE THIS TR IBUNAL IN ASSESSEE'S OWN CASE IN ITANO.329/MDS./2016 VIDE ORDER DATED 11.08. 2016 WHEREIN HELD AS FOLLOWS:- WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MAT ERIAL ON RECORD. THE MAIN PLEA OF THE LD. A.R IS THAT INV ESTMENT IS IN A SISTER CONCERN AND ASSOCIATED COMPANIES AND SUBSIDI ARIES AND INTEREST PERTAINED TO BORROWINGS USED FOR EARNING E XEMPT INCOME FROM THE INVESTMENTS ONLY TO BE CONSIDERED AND HE D REW OUR ATTENTION TO THE PAPER BOOK SHOWING THAT THE INVEST MENTS ARE IN EQUITY SHARES OF SISTER CONCERNS AND THESE INVESTME NTS ARE MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. HE PLACED RELIAN CE ON THE JUDGMENT OF DELHI HIGH COURT IN THE CASE OF CIT VS. BHARTI OVERSEAS PVT. LTD., DATED 17TH DECEMBER, 2015 WHEREIN HELD T HAT EXPENDITURE IN RELATION TO INCOME WHICH IS EXEMPT SHALL BE AGGR EGATE OF EXPENDITURE ATTRIBUTABLE TO TAX EXEMPTED INCOME, AN D WHERE THERE IS COMMON EXPENDITURE, THAT CANNOT BE ATTRIBUTABLE TO EITHER TAX ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 17 - : EXEMPT INCOME OR TAXABLE INCOME. HE ALSO SUBMITTED THAT INTEREST ON BORROWINGS WHICH IS AVAILABLE FOR SPECIFIC PURPO SE CANNOT BE CONSIDERED FOR DISALLOWANCE U/S.14A R.W.RULE 8D. IN OUR OPINION, THE TRIBUNAL CONSIDERED THIS ISSUE IN THE CASE OF FARID A SHOES PVT. LTD. IN ITA NOS.2102 & 2103/MDS./15 FOR ASSESSMENT YEARS 2011-12 & 2012-12 VIDE ORDER DATED 08.01.16 WHEREIN HELD THA T:- 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINION, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTO N ENGINEERING LTD. IN ITA NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WAS OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE BUSINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANC E U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND TH E RELEVANT PORTION IS REPRODUCED AS BELOW: 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BAN K LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAK ING ANY INVESTMENTS HAVING TAX FREE INCOME. WHILE HOLDI NG SO, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD A S UNDER:- 5.2.1 HAVING HELD THAT PROVISIONS OF RULE 0D ARE A PPLICABLE, LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORR ECTLY QUANTIFIED. THE AO HAD CALCULATED THE DISALLOWANCE AT ` NIL, P 1,04,38,000/- AND P 26,87,000/ - UNDER (I), (II) & (III) OF RULE 80 (2)RESPECTIVELY. THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT, BECAUSE IT IS NIL. WITH REGARD TO THE SE COND COMPONENT BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AO HAS DETERMINED THE AMOUNT AT P 1,04,38,000/. THE AO HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDIT URE OF P 5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWANCE. THE ID.AR, IN HIS SUBMISSION, HAS GIVEN THE BREAK-UP OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS: P67,92,0 00/- (2) INTEREST ON TERM LOANS P 3,82,11,000/- AND (3) INT EREST ON OTHER ACCOUNTS: P 1,29,43,000/-. IF LOANS HAVE BEEN ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 18 - : SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COUL D NOT HAVE BEEN UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX -FREE INCOMES. FROM THE COPY OF THE SANCTION LETTERS FROM STATE BANK OF BIKANER & JAIPUR IT CAN BE SEEN THAT THE LO AN WAS GRANTED WITH A SPECIFIC REQUIREMENT THAT THE LOAN S HALL BE UTILIZED FOR PURCHASE OF IMPORTED MACHINERY WHILE I N THE CASE OF LOAN FROM FEDERAL BANK, IT IS SEEN THAT THE LOAN WAS TO BE UTILIZED FOR EXPANSION OF PROJECTS. SANCTION OF BOT H THESE LOANS PROHIBIT UTILIZATION OF FUNDS FOR PURPOSES OTHER TH AN FOR THE UTILIZATION FOR WHICH THEY ARE SANCTIONED. FROM THE LEDGER EXTRACT FOR THE YEAR ENDED 31.03.2008 FOR BOTH LOAN ACCOUNTS, IT IS SEEN THAT NO AMOUNT HAS BEEN UTILIZED FOR INV ESTMENT IN SUBSIDIARIES WHICH EARNS TAX-FREE INCOME. THE LOAN AMOUNTS WERE FULLY DISBURSED AND UTILIZED IN THE YEAR ENDED 31.03.2008 (A.Y. 2008-09) ITSELF. TAKING INTO ALL THE FACTS AS STATED ABOVE, I AM OF THE CONSIDERED OPINION THAT IF LOANS/BORROW ED AMOUNTS ARE GRANTED FOR SPECIFIC PROJECTS/EXPANSION AND NO AMOUNT FROM THE SAME HAS BEEN DIRECTLY UTILIZED FOR INVESTMENTS, THEN THE FIRST AND SECOND LIMB OF RULE 80 ATTRIBUTING THE INTEREST PAYMENTS TO THE INVESTMENT S WILL NOT BE APPLICABLE. ACCORDINGLY, INTEREST ON BANK LOAN A ND TERM LOAN AMOUNTING TO P 67,92,000/ - AND P 3,82,11,000/ - RESPECTIVELY ARE TO BE EXCLUDED FROM THE CALCULATIO N TO DETERMINE THE DISALLOWANCE UNDER RULE 8D(2)(II). TH E AO IS, THEREFORE, DIRECTED TO TAKE INTO ACCOUNT ONLY THE R EMAINING INTEREST ON OTHER ACCOUNTS AMOUNTING TO P 1,29,43,000/ - FOR COMPUTING THE PROPORTIONATE DISALLOWANCE UNDER RULE 80(2)(II). 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLOWANCE UND ER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOA N AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFIC ALLY SANCTIONED FOR SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INC OME TAX (APPEALS) HAS RIGHTLY EXCLUDED SUCH INTEREST FROM T HE PURVIEW OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II) . 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO.LTD. (SUPRA) ALSO SUPPORT S THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). T HE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 19 - : UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)( II), THE TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED . WHILE HOLDING SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHOD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERN ED. IT IS ONLY WITH REGARD TO THE COMPUTATION UNDER RUL E 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDL Y DEALS WITH A SITUATION IN WHICH THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE SEEKS TO ALLOCATE COMMO N INTEREST EXPENSES TO TAXABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECEIPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATI ON IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WH ILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 20 - : FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO LTD, TOTAL INTEREST EXPENDITURE IS P 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS P 10,000. OUT OF THE BALANCE P 90,000, THE ASSESSEE HAS PAID INTEREST OF P80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR RECEIPT OR INCOME IS THUS ONLY P 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCATION OF INTER EST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT WILL BE FOR P 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) [ I.E. DI RECT INTEREST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE INTERE ST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE P 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE P 10,000/ -. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPE NSES, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2)(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITIES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E, ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 21 - : IS THAT IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO B E EXCLUDED FROM THE DEFINITION OF VARIABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED O N BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACT UAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMU LA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNO T BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THER E IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATI ON ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 22 - : PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERT AINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTICULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II), AND BASED ON SUCH A STA ND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO TH E ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, A S HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROCEED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II ) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIREC T TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RU LE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRATIONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 23 - : FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FO R THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTICE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING T HE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE GR OUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. IN VIEW OF THE ABOVE DECISION, WE ARE OF THE OPINIO N THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR SPECIFIC P URPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PURPOSE OF RU LE 8D OF THE INCOME TAX RULES. FURTHER, INVESTMENTS IN SISTER CO NCERNS OR SUBSIDIARIES WITH WHICH THE ASSESSEE IS HAVING BUSI NESS TRANSACTIONS, THAT INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF APPLICABILITY OF RULE-8D. FOR THIS PROP OSITION WE RELY ON THE JUDGMENTS OF TRIBUNAL IN THE CASE OF SUN TV NE TWORKS IN ITA NO.1340 & 1341/MDS./15 & 1578 TO 1579/MDS/15 WHEREI N HELD THAT:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECO RD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AVAILAB LE SHARE CAPITAL INCLUDING RESERVES AND SURPLUS WAS P2385.7 CRORES AS ON 31.03.2010. THE AVAILABLE SHARE CAPITAL IS P1970 .4 CRORES AND RESERVES AND SURPLUS IS P 21,886.7 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUDING SUBSIDIA RY COMPANIES ARE ONLY P 541.11 CRORES. THEREFORE, IT C ANNOT BE SAID THAT THE ASSESSEE HAS DIVERTED THE BORROWED FU NDS FOR MAKING ANY INVESTMENT EITHER IN THE SISTER CONCERNS OR IN THE MUTUAL FUNDS. WHEN THE ASSESSEE HAS SUFFICIENT SHAR E CAPITAL, RESERVES AND SURPLUS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY DISALLO WANCE TOWARDS THE INTEREST PAID ON THE BORROWED FUNDS UND ER SECTION 14A OF THE ACT. FOR THE PURPOSE OF DISALLOW ING INTEREST INCOME UNDER SECTION 14A READ WITH RULE 8D , THERE SHOULD BE NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT MADE BY THE ASSESSEE IN THE SHARE CAPITA L AND MUTUAL FUNDS. IN THE ABSENCE OF ANY NEXUS, THE PRES UMPTION IS THAT THE ASSESSEE HAS INVESTED THE AVAILABLE INT EREST-FREE FUNDS IN SHARE CAPITAL AND MUTUAL FUNDS. FURTHERMOR E, ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 24 - : MAKING INVESTMENT IN SISTER CONCERNS IS FOR COMMERC IAL EXPEDIENCY IN VIEW OF THE JUDGMENT OF APEX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1. IT IS NOT TH E CASE OF THE REVENUE THAT THE SISTER CONCERN OR ANY OF THE D IRECTORS HAS MISUSED THE FUNDS INVESTED BY THE ASSESSEE. WHE N THE SISTER CONCERN USES THE FUNDS ONLY FOR BUSINESS PUR POSE, THERE WAS COMMERCIAL EXPEDIENCY FOR MAKING INVESTME NT. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THERE CANNOT BE ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 . 13. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, T HE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. WE ALSO RELY IN THE CASE OF BEACH MINERS CO. PVT LT D. VS. ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHEREIN HELD THAT: 6.1. GROUND NO.3 DISALLOWANCE OF EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT FOR P 3,11,34,630/ - SINCE THE ASSESSEE HAD MADE INVESTMENTS OF P 71,55,33,570 /- FOR EARNING EXEMPT INCOME. AT THE OUTSET, WE FIND THAT THERE IS NO MERIT FOR THE REVENUE TO MAKE ADDITION OF P 3,11,34,630/ - INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE IN VESTMENT MADE OF P 71,55,33,570/-, BEARS NO COST IN THE FORM OF INTER EST OR WHATSOEVER, SINCE THE FUNDS BY WHICH THE INVESTM ENT IS MADE IS ASSESSEES OWN FUNDS. FURTHER, THESE INVESTMENTS ARE MADE ONLY WITH SISTER COMPANIES OF THE ASSESSEE AND NO C OST CAN BE ATTRIBUTED FOR THE MANAGEMENT OF SUCH FUNDS. THERE FORE, WE HEREBY DELETE THE ADDITION OF P 3,11,34,630/ - MADE BY THE LD. ASSESSING OFFICER INVOKING THE PROVISIONS OF SECTIO N 14A OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED IN IT S FAVOUR . IN VIEW OF THE ABOVE JUDGMENTS, THE AO HAS TO CONSI DER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AVAILABLE ON THE DATE OF INVESTMENT WHICH YIELDS EXEMPTED INCOME AND THEREAFTER HE SHALL APPL Y THE FORMULA IN RULE 8D AND ALSO EXCLUDE INVESTMENTS IN SUBSIDIARIES AS HEL D BY THE ABOVE ORDER OF CO- ORDINATE BENCH. WITH THIS OBSERVATION, WE REMIT TH E ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. HENCE, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES . 10.1 ACCORDINGLY, THIS ISSUE IS REMITTED BACK TO T HE FILE OF AO FOR FRESH CONSIDERATION IN SIMILAR LINE AS DECIDED BY CO-ORDI NATE BENCH IN THE ORDERS CITED SUPRA. ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 25 - : 11. THE NEXT GROUND IS WITH REGARD TO CHARGING OF NOTIONAL ROYALTY TO TAX. 12. THE FACTS OF THE ISSUE ARE THAT THE TPO HAS GI VEN A SHOW CAUSE IN WHI CH THE ASSESSEE WAS ASKED TO JUSTIFY THE REASON FOR NON-RECEIPT OF ROYALTY DURING THE FINANCIAL YEA R 2010-11, WHEREAS DURING F.Y2009-10,2% ROYALTY WAS CHARGED ON EX-FACT ORY SALE. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE LICENSEE PT TVS INDONESIA WAS CONTINUOUSLY INCURRING LOSSES AND THE ASSESSEE THROUGH AN AMENDMENT TO THE AGREEMENT AGREED THAT ROYALTY WILL BE WAIVED TILL SUCH TIME THE LICENSEE ACHIEVES A MONTHLY SALES OF 10,000 NUMBERS OF TWO WHEELERS (I.E. DEFERMENT). ACCORDING TO DRP, T HE REASONS GIVEN BY THE ASSESSEE ARE NOT SUFFICIENT AND NOTHING NEW HAS BEEN SUBMITTED BEFORE THE DRP. HENCE, THE DRP UPHOLD THE DECISION OF THE TPO. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, ASSESSEE FOLLOWING THE MERCAN TILE SYSTEM OF ACCOUNTING, THERE IS NO QUESTION OF DEFERMENT OF RE CEIPT OF INCOME SINCE THE ASSESSEE WAS IN A POSITION TO CREATE THE DOCUMENT AS THE TRANSACTION WITH AE WHICH CANNOT BE APPRECIATED. IT IS ONLY AFTERTHOUGHT SO AS TO POSTPONE THE LIABILITY OF TAX ATION. ACCORDINGLY, WE ARE OF THE OPINION THAT LOWER AUTHORITIES WERE J USTIFIED TREATING THE ACCRUED ROYALTY AS INCOME OF ASSESSEE. THUS, THIS G ROUND IS REJECTED. ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 26 - : 14. THE NEXT ISSUE IS DISALLOWANCE OF EXPORT AGENC Y COMMISSION PAID TO NON-RESIDENTS U/S.40(A)(I) OF THE ACT. 14.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE H AS INCURRED A SUM OF ` 33,23,82,167/- TOWARDS EXPORT AGENCY COMMISSION. TH E ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE. THE ABOVE PAYMENTS WERE MADE TO FOREIGN AGENTS FOR THE PURPOSE OF PROMOTING THE SAL ES OF THE PRODUCTS OF THE ASSESSEE. HENCE, THE ASSESSEE STATED THAT TH E SERVICES WERE RENDERED BY THE AGENTS OUTSIDE INDIA AND THEREFORE TDS U/S.195 IS NOT APPLICABLE. ALSO THESE AMOUNTS ARE NOT TAXABLE AS PER ARTICLE-7 BUSINESS PROFITS OF THE DTAA BETWEEN INDIA AND SING APORE AS THE SERVICES WERE RENDERED FROM OUTSIDE INDIA AND NOT F ROM ANY PERMANENT ESTABLISHMENT IN INDIA. ACCORDING TO AO, THE PAYMENTS WERE MADE FOR THE ASSESSEES BUSINESS PURPOSES, WHI CH ARE CARRIED ON IN INDIA. HENCE, THE PAYMENT, THOUGH MADE TO NON-RE SIDENTS AT ABROAD, IS DEEMED TO HAVE ARISEN IN INDIA. AO NOTED IN HIS ASSESSMENT ORDER THAT IT IS THE AO AND NOT THE ASSESSEE OR THE NON-RESIDENT TO WHOM THE COMMISSION PAYMENT IS MADE CAN DECIDE ABOU T THE APPLICABILITY OF SEC.195(1) OR SEC.40(A)(I) OF THE ACT. ACCORDING TO AO, EITHER THE ASSESSEE COMPANY OR THE RECIPIENTS OUGHT TO HAVE MADE AN APPLICATION U/S.195(2) OR 195(3) RESPECTIVELY BEFOR E THE INCOME TAX AUTHORITY, AT INTERNATIONAL TAXATION, WHO CAN EXEMP T THE CASE FROM LIABILITY TO TDS U/S.195(1) OF THE ACT. SINCE NEIT HER THE ASSESSEE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 27 - : COMPANY NOR THE RECIPIENTS OF COMMISSIONS HAVE AVAI LED THE PROVISIONS, THE AO HAS NO OTHER OPTION BUT TO INVO KE PROVISIONS OF THE SECTION 40(A)(I) OF THE ACT FOR NON COMPLIANCE TO P ROVISIONS 195(1) OF THE ACT. HENCE, THE AO MADE AN ADDITION OF ` 33,23,82,167/- TOWARDS EXPORT AGENCY COMMISSION. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. A SIMILAR ISSUE CAME FOR CONSIDERATION BEFO RE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN ITA NOS.1707 & 1782/MDS./201 2 FOR ASSESSMENT YEAR 2008-09 VIDE ORDER DATED 27.04.2016 WHEREIN HELD AS FOLLOWS:- 27. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERU SED THE MATERIALS ON RECORD. WITH REGARD TO THE ISSUE AS TO WHETHER THE TDS HAS TO BE DEDUCTED OR NOT WHEN THE COMMISSION PAYMENT MADE TO THE OVER SEAS AGENTS, THE ISUSE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS. FAIZAN SHOES PVT LTD. [2014} 367 ITR 155, WHEREIN BY DISMISSING THE APPEAL OF THE REVENUE, THE HONBLE HIGH COURT HAS HELD AS UNDER:-- HELD, DISMISSING THE APPEAL, THAT ON A READING OF S ECTION 9(1)(VII) , COMMISSION PAID BY THE ASSESSEE TO THE NON-RESIDENT AGENTS WOULD NOT COME UNDER THE TERM FEES FOR TECHNICAL SERVICE S. FOR PROCURING ORDERS FOR LEATHER BUSINESS FROM OVERSEAS BUYERS, W HOLESALERS OR RETAILERS, AS THE CASE MAY BE, THE NON-RESIDENT AGE NT WAS PAID 2.5 PER CENT. COMMISSION ON FREE ON BOARD BASIS. THIS W AS A COMMISSION SIMPLICITER. WHAT WAS THE NATURE OF TECHNICAL SERVI CE THAT THE NON- RESIDENT AGENTS HAD PROVIDED ABROAD TO THE ASSESSEE WAS NOT CLEAR FROM THE ORDER OF THE ASSESSING OFFICER. THE OPENIN G OF LETTERS OF CREDIT FOR THE PURPOSE OF COMPLETING THE EXPORT OBL IGATION WAS AN INCIDENT OF EXPORT AND, THEREFORE, THE NON-RESIDENT AGENT WAS UNDER ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 28 - : AN OBLIGATION TO RENDER SUCH SERVICES TO THE ASSESS EE, FOR WHICH COMMISSION WAS PAID. THE NON-RESIDENT AGENT DID NOT PROVIDE TECHNICAL SERVICES FOR THE PURPOSES OF RUNNING OF T HE BUSINESS OF THE ASSESSEE IN INDIA. THEREFORE, THE COMMISSION PAID T O THE NON- RESIDENT AGENTS WOULD NOT FALL WITHIN THE DEFINITIO N OF FEES FOR TECHNICAL SERVICES AND THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE ON PAYMENT OF COMMISSION. 28. RESPECTFULLY FOLLOWING THE ABOVE JUDGEMENT OF THE HONBLE JURISDICTIONAL HIGH COURT CITED SUPAR, THE GROUND R AISED BY THE REVENUE IS DISMISSED. IN VIEW OF THE ORDER OF THE TRIBUNAL CITED SUPRA, T HIS GROUND OF ASSESSEE IS ALLOWED 16. NEXT GROUND IS WITH REGARD TO DIRECTION OF THE DRP ERRED IN HOLDING THAT THE HEDGING LOSS IS ALLOWABLE ONLY ON THE BASIS OF ACTUAL REALIZATION AS TERMINATION OF THE CONTRACTS BEFORE 31.03.2011. THE ACIT/DRP OUGHT TO HAVE APPRECIATED THAT LOSS ON FOR EIGN EXCHANGE IS INCURRED IN THE COURSE OF BUSINESS AND HENCE IS ALL OWABLE AS REVENUE EXPENDITURE IN FULL. ENTRIES IN THE BOOKS OF ACCOUN TS WILL NOT DETERMINE THE ALLOWABILITY UNDER THE INCOME TAX ACT. 17. THE FACTS OF THE ISSUE ARE THAT THE COMPANY HA S AVAILED EXTERNAL COMMERCIAL BORROWINGS IN FOREIGN CURRENCY FOR THE PURPOSE OF ACQUISITION OF FIXED ASSETS AND THE PERIOD OF LO AN IS FOR MORE THAN 5 YEARS. THE LOAN HAS TO BE REPAID OVER A PERIOD AS PER THE REPAYMENT SCHEDULE. AS THE REPAYMENT OF LOAN HAS TO BE MADE IN FOREIGN CURRENCY, THE COMPANY HAS ENTERED INTO HEDGING CONT ACT WITH BANKS TO AVOID FOREIGN CURRENCY RISK. COST OF SUCH HEDGING AGAINST THE FOREIGN ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 29 - : CURRENCY RISK HAS BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT SINCE SUCH COST HAS BEEN INCURRED IN RELATION TO ACQUISITION O F FIXED ASSETS. THE AO DISALLOWED THE AMOUNT HOLDING THAT EXPENDITURE WAS NOT INCIDENTAL TO THE BUSINESS ON THE GROUND THAT ASSESSEE HAS CHANGE D THEIR STAND WHEN IT COMES TO CLAIMING OF EXPENDITURE UNDER THE INCOME TAX ACT. 17.1 THE DRP STAND IS THAT THE EXCHANGE LOSSES ARE TO BE RECOGNIZED ONLY IN THE YEAR OF ACTUAL PAYMENT/TERMI NATION. THE CLAIM OF MARKED TO MARKET LOSSES BE IT FOR HEDGING FOR SPECULATION, IS NOTIONAL AND DISALLOWABLE AS PER CBDT INSTRUCTION N O.03 OF 2010 DATED 23.03.3010. AS PER CBDT INSTRUCTION NO.03, MARKED TO MARKET LOSSES ARE NOTIONAL AND CONTINGENT DESPITE THAT MARKED TO MARKET SETTLEMENT IS A TRANSPARENT ACCOUNTING PRACTICE. IN TERMS OF THIS INSTRUCTION EVEN ACTUAL LOSSES I.E. HEDGE LOSS ARE ALLOWABLE AS NON- SPECULATIVE ONLY IF THE TRANSACTION QUANTITY UNDER CLAUSE (D) OF THE PROVISO TO SECTION 43(5). MARKED TO MARKET LOSSES CLAIMED AS NOTIONAL LOSSES PRIOR TO SETTLEMENT HAS TO BE TREATED AS SPE CULATIVE LOSS IN TERMS OF SEC.43(5) OF THE ACT. HENCE, THE DRP TREATED IT AS SPECULATIVE LOSS IN TERMS OF SEC.43(5) OF THE ACT. AGAINST THIS, THE AS SESSEE IS IN APPEAL BEFORE US. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF LOWER AUTHORITIES. LD.A.R SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 30 - : TRIBUNAL IN THE CASE OF COTTON BLOSSOM INDIA PVT LT D VS. ACIT IN ITA NO.2032/MDS./2012 VIDE ORDER DATED 21.02.2013 FOR ASSESSMENT YEAR 2006-07 AND THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS.WOODWARD GOVERNOR INDIA PVT LTD. IN 312 ITR 245( SC) . IN OUR OPINION, THE ABOVE JUDGEMENTS HAVE NO APPLICATION TO THE FAC TS OF THE CASE. SINCE THE TRANSACTION IS RELATING TO ACQUISITION OF FIXED ASSETS AND THE PROFIT OR LOSS TO BE TREATED IN CAPITAL FIELD AND I T CANNOT BE IN REVENUE IN NATURE AS HELD BY SPECIAL BENCH IN THE CASE OF OIL & NATURE GAS CORPORATION LTD. VS. DCIT REPORTED IN 83 ITD 151(DE L)(SB). HENCE, THIS GROUND OF THE APPEAL IS REJECTED. 19. THE NEXT ISSUE IS THAT THE ACIT/DRP TREATED THE ACT UAL LOSS ON EXCHANGE DIFFERENCE IN REPAYMENT OF ECB LOAN RELATI NG TO NON-IMPORTED ASSETS AS CAPITAL IN NATURE AND ALLOWED ONLY DEPR ECIATION ON SUCH LOSS. 20. THE FACTS OF THE ISSUE IS RELATED TO ACTUAL LO SS ON EXCHANGE DIFFERENCE IN REPAYMENT OF ECB LOAN. BEFORE AO LD.A .R SUBMITTED THAT SECTION 43A APPLIED TO ASSETS IMPORTER FROM A FOREI GN COUNTRY OUT OF FOREIGN CURRENCY LOAN AND IN THE INSTANT CASE EXCHA NGE LOSS/GAIN RELATED TO IMPORTER ASSETS HAS BEEN CAPITALIZED BY THE ASSESSEE ITSELF. AO INVOKED THE PROVISIONS OF THE SECTION 43A, WHICH WAS UPHELD BY DRP. AGAINST THIS ASSESSEE IS IN APPEAL BEFORE US. 21. BEFORE US, LD.A.R RELIED ON THE ORDER OF PUNE TRIBUNAL, IN THE CASE OF COOPER CORPORATION IN ITA NO.866/PN/2014. A CCORDING TO HIM, ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 31 - : FOREIGN FLUCTUATION EXCHANGE FLUCTUATION IN REVENUE S FIELD. HENCE, IT IS ALLOWABLE EXPENDITURE. 22. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, THIS ISSUE CAME UP FOR CONSIDER ATION BEFORE PUNE TRIBUNAL, IN THE CASE OF COOPER CORPORATION IN ITA NO.866/PN/2014 VIDE ORDER DATED 29.04.2016 FOR ASSESSMENT YEAR 200 8-09WHEREIN HELD AS FOLLOWS:- 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. ORDER OF THE AUTHORITIES BELOW AND CASE LAWS CITED. THE CENTRAL ISSUE INVOLVED IN THE PRESENT CASE IS WHETHER PROVISIONS FOR LOSS IN THE HANDS OF ASSESSEE ON ACCOUNT OF RESTATEMENT OF OUTSTANDING FOREIGN CURRE NCY LOANS NECESSITATED BY FLUCTUATION IN FOREIGN EXCHANGE WOULD BE ALLOWAB LE AS BUSINESS LOSS OR A LOSS OF CAPITAL NATURE IN THE FACTS NARRATED ABOVE. WHILE AS PER THE REVENUE, THE INCREASED LIABILITY DUE TO EXCHANGE FLUCTUATION CORRESPOND WI TH CARRYING COSTS OF THE FIXED ASSETS AND THUS CAPITAL IN NATURE, THE ASSESSEE SEEKS TO SUBMIT THAT THE LOSS IS REVENUE IN NATURE. 10.1 ON CONSIDERATION OF FACTS, IT IS NOTICED THAT CERTAIN LOANS WERE HELD IN INDIAN CURRENCY IN THE EARLIER YEARS. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH THE LENDERS TO CONVERT THE LOANS IN FOREIGN CURRENCY EQUIVALENTS TO TAKE ADVANTAGE OF THE LOWER RATE OF INTEREST RATE APPLICABLE TO LATER. THE ASSESSEE HAS FACTUALLY DEMONSTRATED T HAT THE CONVERSION INTO FOREIGN CURRENCY LOANS HAVE ACTUALLY BENEFITED THE ASSESSEE IN TERMS OF SAVING OF INTEREST COSTS. WE ALSO NOTICE THAT THERE IS NO DISPUTE ON THE FACT THAT THE ACQUISITION OF CAPITAL ASSETS / EXPANSION OF PROJECTS ETC. FROM THE TERM LOANS TAKEN ARE ALREADY COMPLETE AND THE ASSET S SO ACQUIRED HAVE BEEN PUT TO USE. AS A CONSEQUENCE, THE LOSS OCCASIO NED FROM FOREIGN CURRENCY LOANS SO CONVERTED IS A POST FACTO EVENT S UBSEQUENT TO CAPITAL ASSETS HAVING BEEN PUT TO USE. WE SIMULTANEOUSLY NO TICE THAT THERE IS NO ADVERSE FINDING FROM THE REVENUE ABOUT THE CORRECTN ESS OR COMPLETENESS OF ACCOUNTS OF ASSESSEE ON THE TOUCHSTONE OF SECTIO N 145 OF THE ACT. IN ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 32 - : OTHER WORDS, THE PROFITS/GAINS FROM THE BUSINESS HA VE BEEN ADMITTEDLY COMPUTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCO UNTING PRACTICES AND GUIDELINES NOTIFIED. 10.2 THE ASSESSEE HAS INTER ALIA APPLIED AS-IL DEAL ING WITH EFFECTS OF THE CHANGES IN THE EXCHANGE RATE TO RECORD THE LOSSES I NCURRED OWING TO FLUCTUATION IN THE FOREIGN EXCHANGE. AS-11 ENJOINS REPORTING OF MONETARY ITEMS DENOMINATED FOREIGN CURRENCY USING THE CLOSIN G RATE AT THE END OF THE ACCOUNTING YEAR. IT ALSO REQUIRES THAT ANY DIFFEREN CE, LOSS OR GAIN, ARISING FROM SUCH CONVERSION OF THE LIABILITY AT THE CLOSIN G RATE SHOULD BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT FOR THE REP ORTING PERIOD. IN THE SAME VAIN, CBDT NOTIFICATION S.O. 892(E) DATED 3 1-03-20 15 REFERRED TO ALSO INTER ALIA DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCES . THE NOTIFICATION ALSO SETS OUT THAT THE EXCHANGE DIFFERENCES ARISING ON F OREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR BU SINESS EXPENSE IN THE PERIOD IN WHICH THEY ARISE SUBJECT TO EXCEPTION AS SET OUT IN SECTION 43A OR RULE 115 OF THE INCOME TAX RULES, 1962 AS THE CASE MAY BE. 10.3 THE CONTENTION OF THE REVENUE THAT THE LOSS IS ONLY CONTINGENT AND NOTIONAL AND SUBSISTING HAS BEEN EXAMINED. AS PER S ECTION 209 OF THE COMPANIES ACT, 1956, THE ASSESSEE BEING A COMPANY I S REQUIRED TO COMPULSORILY FOLLOW MERCANTILE SYSTEM OF ACCOUNTING . S. 211 OF THE COMPANIES ACT, 1956 ALSO, IN TERMS, MANDATES THAT A CCOUNTING STANDARDS AS APPLICABLE IS REQUIRED TO BE FOLLOWED WHILE DRAW ING STATEMENT OF AFFAIRS. S. 145 OF THE INCOME TAX ACT, 1961 SIMILARLY CASTS OBLIGATION TO COMPUTE BUSINESS INCOME EITHER BY CASH OR MERCANTILE SYSTEM OF ACCOUNTING. THUS, IN VIEW OF THE VARIOUS PROVISIOFIS OF THE COMPANIES ACT AND INCOME TAX ACT, IT WAS MANDATORY TO DRAW ACCOUNTS AS PER AS II. THU S, IN OUR CONSIDERED VIEW, THE LOSS RECOGNIZED ON ACCOUNT OF FOREIGN EXC HANGE FLUCTUATION AS PER NOTIFIED ACCOUNTING STANDARD AS 11 IS AN ACCRUED AN D SUBSISTING LIABILITY AND NOT MERELY A CONTINGENT OR A I HYPOTHETICAL LIABILI TY. A LEGAL LIABILITY ALSO EXISTS AGAINST THE ASSESSEE DUE TO FLUCTUATION AND LOSS ARISING THEREFROM. ACTUAL PAYMENT OF LOSS IS AN IRRELEVANT CONSIDERATI ON TO ASCERTAIN THE POINT OF ACCRUAL OF LIABILITY. AS A COROLLARY, THE REVENU E HAS COMMITTED ERROR IN HOLDING THE LIABILITY AS NOTIONAL OR CONTINGENT. ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 33 - : 10.4 COPIOUS REFERENCE HAS BEEN MADE TO S. 43A BY A SSESSEE AS WELL AS REVENUE. THUS, IT WOULD BE PERTINENT TO EXAMINE THE ISSUE ON THE TOUCHSTONE OF S. 43A OF THE ACT. SECTION 43A, TO TH E EXTENT RELEVANT IN THE CONTEXT, READS AS UNDER: NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISION OF THIS ACT, WHERE AN ASSESSEE HAS ACQUIREDANY ASSET I N ANY PREVIOUS YEAR FROM A COUNTRY OUTSIDE INDIA FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND, IN CONSEQUENCE OF A CHANGE IN THE RATE OF EXCHANGE DURING ANY PREVIOUS YEAR AFTER THE ACQUISITION OF SUCH ASSET, THERE IS AN INCREASE OR REDUCTION IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIA N CURRENCY (AS COMPARED TO THE LIABILITY EXISTING AT THE TIME OF A CQUISITION OF THE ASSET) AT THE TIME OF MAKING PAYMENT (A) TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSET; OR (B) TOWARDS REPMMENL OF THE WHOLE OR A PART OF TH E MONEYS BORROWED BY HUN FROM AM PERSON, DIRECT/V OR INDIRE CT/V. IN ANY FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF AC QUIRING THE ASSET ALONG WITH INTEREST, IF ANY. THE AMOUNT BY WHICH THE LIABILITY AS AFORESAID IS S O INCREASED OR REDUCED DURING SUCH PREVIOUS YEAR AND WHICH IS TAKE N INTO ACCOUNT AT THE TIME OF MAKING THE PAYMENT. IRRESPEC TIVE OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE, SHALL BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED FROM- (I) THE ACTUAL COST OF THE ASSET AS DEFINED IN CLAU SE (I) OF SECTION 43; OR (II) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUBSECTION (I) OF SECTION 35: OR (III) THE AMO,MT OF EXPENDITURE OF A CAPITAL NATURE RE/RRED TO IN SECTION 35A; OR (IV) THE AMOUNT OF EXPENDITURE A/A CAPITAL NATURE R EFERRED TO IN CLAUSE (IX) OFSUBSECTION (I) OF SECTION 36: OR ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 34 - : (V) THE COST OF ACQUISITION OF A CAPITAL ASSET (NOT BEING A CAPITAL ASSET REFERRED TO IN SECTION 50)FOR THE PUMPOSES OF SECTION 48, AND THE AMOUNT ARRIVED AT AFTER SUCH ADDITION OR DE DUCTION SHALL BE TAKEMZ TO BE THE ACTUAL COST OF THE ASSET OR THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE OM AS THE CASE MAY BE, THE COST OF INQUISITION OF THE CAPITAL ASSET AS AFORESAID: PROVIDED THAT WHERE AN ADDITION TO OR DEDUCTION HEM THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION HAS BEEN MADE UNDER THIS SECTION, AS IT STOOD IMMEDIATELY BEFORE ITS SU BSTITUTION BY THE FINANCE ACT, 2002, ON ACCOUNT OF AN INCREASE OR REDUCTION IN THE LIABILITY AS AFORESAID, THE AMOUNT TO BE ADD ED TO OR, AS THE CASE MAY HE. DEDUCTED UNDER THIS SECTION FROM, THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION AT THE T IME OF MAKING THE PAYMENT SHALL BE SO ADJUSTED THAT THE TOTAL AMO UNT ADDED TO, OR, AS THE CASE IMLAY BE, DEDUCTED FROM, THE AC TUAL COST OR EXPENDITURE OR COST OF ACQUISITION, IS EQUAL TO THE INCREASE OR REDUCTION IN THE AFORESAID LIABILITY TAKEN INTO ACC OUNT AT THE TIME OF MAKING PAYMENT A BARE READING OF THE AFORESAID PROVISION OF SECTIO N 43A, WHICH OPENS WITH A NON-OBSTANTE AND OVERRIDING CLAUSE, WOULD SHOW THAT IT COMES INTO PLAY ONLY WHEN THE ASSETS ARE ACQUIRED FROM A COUNTRY OUTSIDE INDIA AND DOES NOT APPLY TO ACQUISITION OF INDIGENOUS ASSETS. ANOTHER NOTABLE FEATURE IS THAT S. 43A PROVIDES FOR MAKING CORRESPONDING ADJUSTMENTS T O THE COSTS OF ASSETS ONLY IN RELATION TO EXCHANGE GAINS/ LOSSES ARISING AT THE TIME OF MAKING PAYMENT. IT THEREFORE DEALS WITH REALISED EXCHANGE GAIN! LOSS. THE TREATMENT OF UNREALISED EXCHANGE GAIN! LOSS IS NOT COVERED UN DER THE SCOPE OF S. 43A OF THE ACT. IT IS THUS APPARENT THAT SPECIAL PROVIS ION OF S. 43A HAS NO APPLICATION TO THE FACTS OF THE CASE. THEREFORE, TH E ISSUE WHETHER, THE LOSS IS ON REVENUE ACCOUNT OR A CAPITAL ONE IS REQUIRED TO BE TESTED IN THE LIGHT OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, PRONOUNCE MENTS AND GUIDELINES ETC. 10.5 BEFORE WE DELINEATE ON THE ALLOWABILITY OF LOS S BASED ON GENERALLY ACCEPTED ACCOUNTANCY PRINCIPLES, IT MAY BE PERTINEN T TO EXAMINE WHETHER ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 35 - : THE INCREASED LIABILITY DUE TO FLUCTUATION LOSS CAN BE ADDED TO THE CARRYING COSTS OF CORRESPONDING CAPITAL ASSETS WITH REFERENC E TO S. 43(1) OF THE ACT. SECTION 43(1) DEFINES THE EXPRESSION ACTUAL COST. AS PER S. 43(1), ACTUAL COST MEANS ACTUAL COST OF THE ASSETS TO THE ASSESSE E, REDUCED BY THAT PORTION OF THE COSTS AS HAS BEEN MET DIRECTLY OR IN DIRECTLY BY ANY OTHER PERSON OR AUTHORITY. SEVERAL EXPLANATIONS HAVE BEEN APPENDED TO S. 43(1). HOWEVER, THE SECTION NOWHERE SPECIFIES THAT ANY GAI N OR LOSS ON FOREIGN CURRENCY LOAN ACQUIRED FOR PURCHASE OF INDIGENOUS A SSETS WILL HAVE TO BE REDUCED OR ADDED TO THE COSTS OF THE ASSETS. THUS, VIEWED FROM THIS PERSPECTIVE ALSO, SUCH INCREASED LIABILITY CANNOT B E BRACKETED WITH COST OF ACQUISITION OF CAPITAL ASSETS SAVE AND EXCEPT IN TE RMS OF OVERRUTHNG PROVISMNS OF S. 43A OF THE ACT. 10.6 WE ALSO SIMULTANEOUSLY NOTE HERE THAT THE HON BLE SUPREME COURT IN THE & CASE OF CIT VS. TATA IRON AND STEEL CO. LTD. (1998) 22 ITR 285 HELD THAT COST OF AN ASSET AND COST OF RAISING MONEY FOR PURCHASE OF ASSET ARE TWO DIFFERENT AND INDEPENDENT TRANSACTIONS. THUS, E VENTS SUBSEQUENT TO ACQUISITION OF ASSETS CANNOT CHANGE PRICE PAID FOR IT. THEREFORE, FLUCTUATIONS IN FOREIGN EXCHANGE RATE WHILE REPAYING INSTALLMENT S OF FOREIGN LOAN RAISED TO ACQUIRE ASSET CANNOT ALTER ACTUAL COST OF ASSETS. T HE RELEVANT OPERATIVE PARA IS REPRODUCED HEREUNDER:- COMING TO THE QUESTION RAISED, WE FIND IT DIFFICULT TO FOLLOW HOW THE MANNER OF REPAYMENT OF LOAN CAN AFFECT THE COST OF THE ASSETS ACQUIRED BY THE ASSESSEE. WHAT IS THE ACTUAL COST M UST DEPEND ON THE AMOUNT PAID BY THE ASSESSEE TO ACQUIRE THE ASSE T. THE AMOUNT MAY HAVE BEEN BORROWED BY THE ASSESSEE BUT E VEN IF THE ASSESSEE DID NOT REPAY THE LOAN IT WILL NOT ALTER T HE COST OF THE ASSET. IF THE BORROWER DEFAULTS IN REPAYMENT OF A P ART OF THE LOAN, THE COST OF THE ASSET WILL NOT CHANGE. WHAT HAS TO BE HOME IN MIND IS THAT THE COST OF AN ASSET AND THE COST OF R AISING MONEY FOR PURCHASE OF THE ASSET ARE TWO DIFFERENT AND INDEPEN DENT TRANSACTIONS. EVEN IF AN ASSET IS PURCHASED WITH NO N-REPAYABLE SUBSIDY RECEIVED FROM THE GOVERNMENT. THE COST OF T HE ASSET WILL BE THE PRICE PAID BY THE ASSESSEE FOR ACQUIRING THE ASSET. IN THE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 36 - : INSTANT CASE, THE ALLEGATION IS THAT AT THE TIME OF REPAYMENT OF LOAN, THERE WAS A FLUCTUATION IN THE RATE OF FOREIG N EXCHANGE AS A RESULT OF WHICH, THE ASSESSEE HAD TO REPAY A MUCH L ESSER AMOUNT THAN HE WOULD HAVE OTHERWISE PAID. IN OUR JUDGMENT, THIS IS NOT A FACTOR WHICH CAN ALTER THE COST INCURRED BY THE ASS ESSEE FOR PURCHASE OF THE ASSET. THE ASSESSEE MAY HAVE RAISED THE FUNDS TO PURCHASE THE ASSET BY BORROWING BUT WHAT THE ASSESS EE HAS PAID FOR IT, IS THE PRICE OF THE ASSET. THAT PRICE CANNO T CHANGE BY ANY EVENT SUBSEQUENT TO THE ACQUISITION OF THE ASSET. I N OUR JUDGMENT, THE MANNER OR MODE OF REPAYMENT OF THE LOAN HAS NOT HING TO DO WITH THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE FOR THE PURPOSE OF HIS BUSINESS. WE HOLD THAT THE QUESTIONS WERE RI GHTLY ANSWERED BY THE HIGH COURT. THE APPEALS ARE DISMISSED. THERE WILL BE NO ORDER AS TO COSTS. THUS, IT IS EVIDENT THE VARIATION IN THE LOAN AMOUN T HAS NO BEARING ON THE COST OF THE ASSET AS THE LOAN IS A DISTINCT AND IND EPENDENT TRANSACTION AS IN COMPARISON WITH ACQUISITION OF ASSETS OUT OF SAID L OAN AMOUNT BORROWED. ACTUAL COST OF THE CORRESPONDING FIXED ASSET ACQUIR ED EARLIER BY UTILIZING THE AFORESAID LOAN WILL NOT UNDERGO ANY CHANGE OWING TO SUCH FLUCTUATION. 10.7 THE ISSUE IS ALSO TESTED IN THE LIGHT OF PROVI SION OF S. 36(L)(III) GOVERNING DEDUCTION OF INTEREST COSTS ON BORROWALS. AS STATED EARLIER, MANNER OF UTILIZATION OF LOAN AMOUNT HAS NOTHING TO DO WITH A LLOWABILITY OF ANY EXPENDITURE IN CONNECTION WITH LOAN REPAYMENT. BOTH ARE INDEPENDENT AND DISTINCT TRANSACTIONS IN NATURE. SIMILAR ANALOGY CA N BE DRAWN FROM S. 36(L)(III) OF THE ACT WHICH ALSO REINFORCES THAT UT ILIZATION OF LOAN FOR CAPITAL ACCOUNT OR REVENUE ACCOUNT PURPOSE HAS NOTHING TO D O WITH ALLOWABLITY OF CORRESPONDING INTEREST EXPENDITURE. A PROVISO INSER TED THERETO BY FINANCE ACT, 2003, ALSO PROHIBITS CLAIM OF INTEREST EXPENDI TURE IN REVENUE ACCOUNT ONLY UPTO THE DATE ON WHICH CAPITAL ASSET IS PUT TO USE. ONCE THE CAPITAL ASSET IS PUT TO USE, THE INTEREST EXPENDITURE ON MO NEY BORROWED FOR ACQUISITION OF CAPITAL ASSET IS ALSO TREATED AS REV ENUE EXPENDITURE. AS ALSO NOTED, S. 43A SPECIFICALLY AND CATEGORICALLY CALLS FOR ADJUSTMENTS IN COST OF ASSETS FOR LOSS OR GAIN ARISING OUT OF FOREIGN CURR ENCY FLUCTUATIONS IN RESPECT ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 37 - : OF FUNDS BORROWED IN FOREIGN CURRENCY FOR ACQUISITI ON OF FOREIGN ASSETS. HOWEVER, THE SAME RATIONALE OF A DEEMING PROVISION OF S. 43A CANNOT BE APPLIED TO LOSS OR GAIN ARISING FROM FOREIGN CURREN CY LOSS UTILIZED FOR PURCHASE OF INDIGENOUS ASSETS. NEEDLESS TO SAY, IMP UGNED CURRENCY FLUCTUATION LOSS HAS EMANATED FROM FOREIGN CURRENCY LOANS. BESIDES AS-I 1, THE CLAIM OF EXCHANGE FLUCTUATION LOSS AS REVENUE A CCOUNT IS ALSO FOUNDED ON THE ARGUMENT THAT THE AFORESAID ACTION WAS TAKEN TO SAVE INTEREST COSTS AND CONSEQUENTLY TO AUGMENT THE PROFITABILITY OR REDUCE REVENUE LOSSES OF THE ASSESSEE. THE IMPUGNED FLUCTUATION LOSS THEREFORE H AS A DIRECT NEXUS TO THE SAVING IN INTEREST COSTS WITHOUT BRINGING ANY NEW C APITAL ASSET INTO EXISTENCE. THUS, THE BUSINESS EXIGENCIES ARE IMPLIC IT AS WELL EXPLICIT IN THE ACTION OF THE ASSESSEE. THE ARGUMENT THAT THE ACT O F CONVERSION HAS SERVED A HEDGING MECHANISM AGAINST REVENUE RECEIPTS FROM E XPORT ALSO PORTRAYS COMMERCIAL EXPEDIENCY. THUS, WE ARE OF THE OPINION THAT THE PLEA OF THE ASSESSEE FOR CLAIM OF EXPENDITURE IS ATTRIBUTABLE T O REVENUE ACCOUNT HAS CONSIDERABLE MERITS. 10.8 SECTION 145 OF THE INCOME TAX ACT DEALS WITH M ETHOD OF ACCOUNTING AND STATES THAT BUSINESS INCOME INTER-ALIA HAS TO B E COMPUTED IN ACCORDANCE WITH CASH OR MERCANTILE SYSTEM OF ACCOUNTING. SUB-S ECTION (2) THEREOF AUTHORIZES THE CENTRAL GOVERNMENT TO NOTIFY ACCOUNT ING STANDARDS TO BE FOLLOWED FOR DETERMINATION OF BUSINESS INCOME. SECT ION 211 OF THE COMPANIES ACT ALSO SIMILARLY CASTS A DUTY ON A COMP ANY TO GIVE A TRUE AND FAIR VIEW OF THE PROFIT AND LOSS OF THE COMPANY FOR THE FINANCIAL YEAR. IT ALSO REQUIRES THE COMPANY TO ADHERE, THE ACCOUNTING STAN DARDS FOR PREPARATION OF PROFIT IN THE PROFIT & LOSS ACCOUNT AND THE BALA NCE SHEET. A CONJOINT READING OF SECTION 145 OF THE ACT AND SECTION 211 O F THE COMPANIES ACT LEAVES NO ROOM FOR DOUBT THAT THE ASSESSEE IS OBLI GED TO FOLLOW THE ACCOUNTING STANDARDS PRESCRIBED TO DETERMINE BUSINE SS INCOME UNDER THE HEAD BUSINESS OR PROFESSION. WE NOTICE THAT THE H ONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA ) HAS OBSERVED THAT AS-I I IS MANDATORY IN NATURE. IN THE LIGHT OF OBSE RVATIONS MADE IN WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA), WE ARC OF THE VIEW THAT LOSS ARISING ON FOREIGN EXCHANGE FLUCTUATION LOSS HAS BE EN RIGHTLY ACCOUNTED FOR ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 38 - : AS A REVENUE EXPENSE IN THE PROFIT & LOSS ACCOUNT I N ACCORDANCE WITH ACCOUNTING FIAT OF AS-11. 10.9 WE FIND THAT THE DECISION IN THE CASE OF SUTLE J COTTON MILLS LTD. (SUPRA) RELIED UPON BY THE LD. DEPARTMENTAL REPRESENTATIVE IS OF NO ASSISTANCE TO THE REVENUE. THE HONBLE SUPREME COURT THEREIN STAT ED THE PRINCIPLE OF LAW THAT WHERE ANY PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF DEPRECIATION IN FOREIGN CURRENCY HELD BY HIM ON CON VERSION FROM ANOTHER CURRENCY, SUCH PROFIT AND LOSS WOULD ORDINARY BE TR ADING LOSS IF THE FOREIGN CURRENCY HELD BY THE ASSESSEE ON REVENUE ACCOUNT AS TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARGO IN BUSINESS. HO WEVER, IF THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET, THE LOSS SHOUL D BE CAPITAL IN NATURE. THE AFORESAID PRINCIPLE OF LAW IS REQUIRED TO BE APPLIE D TO THE FACTS OF CASE TO DETERMINE WHETHER THE FOREIGN CURRENCY IS HELD BY T HE ASSESSEE ON REVENUE ACCOUNT OR AS A PART OF CIRCULATING CAPITAL. IN THE PRESENT CASE, FLUCTUATION LOSS INFLICTED UPON THE ASSESSEE BEARS NO NEXUS OR RELATION TO THE ACQUISITION TO THE ASSETS. THE ACTION OF THE ASSESSEE IS TIED U P TO ITS UNDERLYING OBJECTIVE I.E. SAVING IN INTEREST COSTS, HEDGING IT S REVENUE RECEIPTS ETC. WHICH ARE UNDOUBTEDLY ON REVENUE ACCOUNT. THUS, THE LOSS GENERATED IN IMPUGNED ACTION BEARS THE CHARACTER OF REVENUE EXPENDITURE. SIMILARLY, DECISION OF THE APEX COURT IN THE CASE OF TATA IRON AND STEEL CO. ( SUPRA) ALSO WEIGHS IN FAVOUR OF THE ASSESSEE. WE ALSO NOTE THAT RELIANCE PLACED BY THE CIT(A) ON ELECON ENGINEERING CO. LTD. (SUPRA) IS MISPLACED. T HE DECISION CONCERNS APPLICABILITY OF S. 43A IN THE FACTS OF THAT CASE A ND THUS CLEARLY DISTINGUISHABLE. 11. FOR THE AFORESAID REASONS, IN THE ABSENCE OF AP PLICABILITY OF SECTION 43A OF THE ACT TO THE FACTS OF THE CASE AND IN THE ABSE NCE OF ANY OTHER PROVISION OF THE INCOME TAX ACT DEALING WITH THE ISSUE, CLAIM OF EXCHANGE FLUCTUATION LOSS IN REVENUE ACCOUNT BY THE ASSESSEE IN ACCORDAN CE WITH GENERALLY ACCEPTED ACCOUNTING PRACTICES AND MANDATORY ACCOUNT ING STANDARDS NOTIFIED BY THE ICAI AND ALSO IN CONFORMITY WITH CBDT NOTIFI CATION CANNOT BE FAULTED. NO INCONSISTENCY WITH ANY PROVISION OF ACT OR WITH ANY ACCOUNTING PRACTICES HAS BEEN BROUGHT TO OUR NOTICE. OTHERWISE ALSO, IN THE LIGHT OF FACT THAT THE CONVERSION IN FOREIGN CURRENCY LOANS WHICH LED TO I MPUGNED LOSS, WERE DICTATED BY REVENUE CONSIDERATIONS TOWARDS SAVING I NTEREST COSTS ETC. WE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 39 - : HAVE NO HESITATION IN COMING TO THE CONCLUSION THAT LOSS BEING ON REVENUE ACCOUNT IS AN ALLOWABLE EXPENDITURE UNDER S. 37(1) OF THE ACT. THE ORDER OF THE CIT(A) SUSTAINING THE DISALLOWANCE IS NOT CALLE D FOR AND IS THUS REVERSED. IN THE RESULT, THE GROUND NO.1 IS ALLOWED. IN VIEW OF THE DECISION OF CO-ORDINATE BENCH OF PUN E TRIBUNAL, THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED. 23. THE NEXT ISSUE IS WITH REGARD TO DISALLOWANCE OF ADDITIONAL DEPRECIATION CLAIMED. 23.1 THE FACTS OF THE ISSUE ARE THAT THE HAS CLAIM ED ADDITIONAL DEPRECIATION WHICH IS THE REMAINDER OF DEPRECIATION FROM THE EARLIER YEAR ON WHICH ONLY 50% OF THE ELIGIBLE DEPRECIATION WAS CLAIMED BY THE ASSESSEE. THE AO NOTED THAT ADDITIONAL DEPRECIATIO N IS ALLOWABLE ONLY ON PLANT AND MACHINERY WHICH ARE PURCHASED IN THE Y EAR AND PUT TO USE THE SAME YEAR. HENCE, THE AO DISALLOWED AN AMOU NT OF ` 4,02,73,723/- DEBITED TO THE P & L STATEMENT. 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, SIMILAR ISSUE CAME UP FOR CONSI DERATION BEFORE THE HIGH COURT OF KARNATAKA IN THE CASE OF ACIT VS. M/S .RITTAL INDIAPVT LTD. IN VIDE ORDER DATED 24.11.2015 IN 2016-TIOL-07-HC- KAR-IT WHEREIN HELD THAT:- IT HAS BEEN CONSISTENTLY HELD BY THIS COURT, AS WE LL AS THE APEX COURT, THAT BENEFICIAL LEGISLATION, AS IN THE PRESE NT CASE, SHOULD BE ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 40 - : GIVEN LIBERAL INTERPRETATION SO AS TO BENEFIT THE A SSESSEE. IN THIS CASE, THE INTENTION OF THE LEGISLATION IS ABSOLUTEL Y CLEAR, THAT THE ASSESSEE SHALL BE ALLOWED CERTAIN ADDITIONAL BENEFI T, WHICH WAS RESTRICTED BY THE PROVISO TO ONLY HALF OF THE SAME BEING GRANTED IN ONE ASSESSMENT YEAR, IF CERTAIN CONDITION WAS NOT F ULFILLED. BUT, THAT, IN OUR CONSIDERED VIEW, WOULD NOT RESTRAIN TH E ASSESSEE FROM CLAIMING THE BALANCE OF THE BENEFIT IN THE SUBSEQUE NT ASSESSMENT YEAR. THE TRIBUNAL, IN OUR VIEW, HAS RIGHTLY HELD T HAT ADDITIONAL DEPRECIATION ALLOWED UNDER SECTION 32(I) (IIA) OF T HE ACT IS A ONETIME BENEFIT TO ENCOURAGE INDUSTRIALIZATION, AND THE PROVISIONS RELATED TO IT HAVE TO BE CONSTRUED REASONABLY, LIBE RALLY AND PURPOSIVELY, TO MAKE THE PROVISION MEANINGFUL WHILE GRANTING ADDITIONAL ALLOWANCE. WE ARE IN FULL AGREEMENT WITH SUCH OBSERVATIONS MADE BY THE TRIBUNAL. IN VIEW OF THE A FORESAID, WE DO NOT FIND THAT ANY INTERFERENCE IS CALLED FOR WITH T HE ORDER OF THE TRIBUNAL, OR THAT ANY QUESTION OF LAW ARISES IN THI S APPEAL FOR DETERMINATION BY THIS COURT. RESPECTFULLY FOLLOWING THE JUDGEMENT OF KARNATAKA H IGH COURT CITED SUPRA, THIS GROUND RAISED BY THE ASSESSEE IS ALLOWE D. 24. NO OTHER GROUNDS ARE ARGUED BEFORE US. ACCORDI NGLY, OTHER GROUNDS RAISED BY THE ASSESSEE IN ITS APPEAL ARE N OT CONSIDERED FOR ADJUDICATION AND TO BE TREATED AS DISMISSED. 25. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 41 - : NEXT, LET US TAKE UP REVENUE S APPEAL IN ITA NO. 1183/MDS./2016 AS UNDER : 26. ON PERUSING THE APPEAL, WE FIND THAT THE AO H AD FILED THE APPEAL WITH DELAY OF 56 DAYS. THE LEARNED AO HAS SUBMITTED A PETITION DATED 29.04.2016 SEEKING CONDONATION OF DELAY AND THE AO STATED IN THIS PETITION THAT THE DELAY OF 56 DAYS IN FILING THE AP PEAL BEFORE THIS TRIBUNAL IS ON ACCOUNT OF MIXING UP OF PAPERS IN HI S OFFICE AND IT TOOK TIME TO LOCATE THE SAME AND AS SOON AS HE TRACED TH E RECORDS, HE FILED THE APPEAL ON 29.04.2016. IN OUR OPINION, THE REASO NS EXPLAINED BY THE AO FOR FILING THE APPEAL BELATEDLY IS BONAFIDE. ACCORDINGLY, THE DELAY IS CONDONED. 27. THE ONLY GROUND IN ITS APPEAL IS THAT THE DRP ERRED IN HOLDING THAT THE EXPENDITURE INCURRED TOWARDS HEDGING COST ON ECB LOAN OBTAINED FOR PURCHASE OF CAPITAL ASSET IS REVENUE EXPENDITURE WITHOUT ANY DISCUSSION EVEN THOUGH THE AO HAS TREATED THE S AME AS CAPITAL EXPENDITURE IN THE DRAFT ASSESSMENT ORDER. 28. SINCE THE SIMILAR ISSUE IS CONSIDERED IN ASSES SEES APPEAL IN PARA-22 OF THIS ORDER, HENCE, THIS GROUND DOES NOT REQUIRE ANY ADJUDICATION AND ACCORDINGLY, THIS GROUND BECOMES I NFRUCTUOUS. ITA NOS.1153& 1183 /MDS./2016 TVS MOTOR COMPANY LTD :- 42 - : 29. IN THE RESULT, THE APPEAL OF REVENUE IS DISMIS SED. 30. TO SUMMARISE THE RESULT, THE APPEAL OF ASSESSE E IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF REVE NUE IS DISMISSED. ORDER PRONOUNCED ON 30 TH NOVEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER / CHENNAI ! / DATED: 30 TH NOVEMBER, 2016 K S SUNDARAM !' $%& '& / COPY TO: 1 . () / APPELLANT 3. * ( ) / CIT(A) 5. &-. $/ / DR 2. $0 () / RESPONDENT 4. * / CIT 6. .1 2 / GF