M/s. Praxair India Pvt. Ltd, Bangalore V. Assistant Commissioner of Income-Tax, Bangalore

ITA 2209/BANG/2016

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8027 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 14-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VANDANA SAGAR
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Rule 8D
• Section: 37; 143(3); 14A; 40(a)(ia); 37(1); 144C; 143(2); 40a(ia); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND MS. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.2209/Bang/2016 Assessment year : 2012-13 M/s Praxair India Pvt. Ltd., Mercury 2B Block, 6 th Floor, Prestige Technology Park, Outer Ring Road, Marathahalli, Bengaluru-566 103. PAN – AAACP 9993 J Vs. The Asst. Commissioner of Income-tax, Large Tax Payer, Circle-1, Bengaluru. APPELLANT RESPONDENT Assessee by : Shri T Suryanarayana, Advocate Revenue by : Smt. Vandana Sagar, CIT(DR) Date of hearing : 17.02.2022 Date of Pronouncement : 25.02.2022 O R D E R Per Padmavathy S, Accountant Member This appeal by the assessee is directed against the order of the AO, LTP, Circle-1, Bengaluru dated 30/9/2016 passed u/s 143(3) r.w.s 144C of the Income-tax Act 1961 (the Act) for the assessment year 2012-13. ITA No.2209/Bang/2016 Page 2 of 25 2. The assessee has raised over all 22 grounds and several sub grounds. i) Grounds 1 and 2 are general nature ii) Grounds 3 to 9 relate to payment of royalty iii) Grounds 10 to 15 relate to payment of interest on compulsory convertible debenture. iv) Ground 16 is with regard to disallowance of expenditure u/s 14A r.w.R 8D of the Act. v) Ground 17 is with regard to foreign exchange loss vi) Ground 18 with regard to Disallowance of expenditure u/s 40a(ia) vii) Grounds 19, 20 and 22 are not pressed by the assessee viii) Ground 21 is consequential in nature. 3. The brief facts of the case The assessee is a company engaged in the business of manufacture and sale of industrial gases and construction of air separate units. The assessee is a subsidiary of M/s Praxair India Ltd., Mauritius . The assessee filed its return of income for the asst. year 2012-13 on 29/11/2012 admitting a total loss of Rs.63,15,18,190/-. The assessee company during the relevant assessment year has entered into certain international transactions with its AEs. Two of the international transactions the assessee entered with its AEs were payment of royalty and payment of interest on Compulsory Convertible Debentures (CCDs). The assessee in its TP study, had aggregated the transaction of payment of royalty with certain ITA No.2209/Bang/2016 Page 3 of 25 other transactions and benchmarked on application of Transactional Net Margin Method (TNMM). The assessee concluded the international transaction of payment of royalty at 4% as being at arm’s length. In respect of the transaction of payment of interest on CCDs at 9% and 12%, the assessee benchmarked the same using independent CCD benchmarking study and concluded the transaction at arm’s length price. 4. The case was selected for scrutiny under CASS and notice u/s 143(2) was served. As the assessee has had international transactions, the case was referred to the TPO u/s 92CA of the Act. During the course of asst. proceedings, the TPO made adjustment towards royalty at 1% for an amount of Rs.24,64,56,204/-. On the payment of interest on CCD, the TPO computed the ALP interest at 5.7% and made an addition of Rs.33,98,48,953/-. 5. Based on the TPO order, the AO passed draft asst. order on 23/02/2016 in which he incorporated the aforesaid TP adjustments and made certain additions /disallowances on the corporate tax front 6 Aggrieved the assessee filed its objections before the DRP. The DRP vide its order dated 11/08/2016 granted marginal relief to the assessee and largely upheld the draft assessment order. ITA No.2209/Bang/2016 Page 4 of 25 7. Pursuant to the directions of the DRP, final asst. order was passed by the AO dated 30.09.2016. 8. Aggrieved by the final asst. order, the assessee filed this appeal before us raising the following issues i. Transfer Pricing adjustment of Rs.24,64,56,204/- on the payment of royalty to the Associated Enterprises (AE) by restricting to 1% against 4% as done by the assessee ii. TP adjustment of Rs.33,98,48,953 with respect to the payment of interest on CCDs by re-characterizing the same to be External Commercial Borrowing (ECB) iii. Disallowance of Rs.9,27,82,000/- under section 14A of the Act iv. Disallowance of Rs.23,00,15,348 under section 37 of the Act being foreing exchange fluctuation loss incurred in respect of loans availed. v. Disallowance of Rs.5,42,35,783 made on the basis of suo moto disallowance made in the earlier financial year 2009-10 under section 40(a) of the Act was re- characterized as disallowance under section 37 of the Act 9. The first issue we will take up the transfer pricing adjustment made by the TPO with respect to payment of royalty @ 1%. ITA No.2209/Bang/2016 Page 5 of 25 10. The ld.AR submitted that this issue is covered in assessee’s own case in ITA No.506/Bang/2016 vide order dated 6/12/2021 for the asst. year 2011-12 wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 11. The ld.DR relied on the written submissions. 12. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (Supra) has held that - “7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2009-2010 in IT(TP)A No.315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No.361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of ALP for payment of royalty to the files of the TPO. The TPO, pursuant to the Tribunal’s order, passed orders accepting the payment of royalty at 4% to be at arm’s length. The relevant portion of the TPO’s order for assessment year 2009-2010 reads as follows:- “3. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 19.06.2017. In response of the same the submission was filed by the assessee on 11.06.2017 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party ITA No.2209/Bang/2016 Page 6 of 25 relationship for which the average royalty rate is computed at 4.10. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e. at 4%, payment towards royalty is being treated to be at arm’s length.” 7.5 The relevant portion of the TPO’s order for assessment year 2010-2011, reads as follows:- “6. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 27.11.2018. In response of the same the submission was filed by the assessee on 12.12.2018 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10%. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e., at 4%, payment towards royalty is being treated to be at arm’s length. 7. Taking all these into consideration, the Royalty payment @ 4% made by the taxpayer to its AE is considered at Arm’s Length, hence no adjustment on account of royalty payment is required to be made 7.6 In view of the above orders of the TPO, accepting the payment of royalty at 4% to be at arm’s length, we hold that the payment of royalty at 4% in the year under consideration is to be treated as being at arm’s length. Accordingly ground 3 is allowed.” 13. Considering the decision of coordinate Bench in assessee’s own case (supra) we allow this ground in favour of ITA No.2209/Bang/2016 Page 7 of 25 the assessee and hold that payment of royalty @ 4% is at arm’s length. 14. The next issue is the adjustment made by the TPO with regard to payment of interest on compulsory convertible debentures (CCDs) by re-characterizing the same to be External Commercial Borrowings (ECB). 15. The Ld.AR submitted that this issue is also covered in assessee’s own case (supra) wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 16. The ld.DR supported the decision of the lower authorities. 17. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (Supra) on the issue of interest on CCDs has held that - 8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International Finance. In the agreement, the term “issue price” is defined as “CCD will be issued at par at Rs.10 each”. Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face value of debenture at INR ITA No.2209/Bang/2016 Page 8 of 25 at Rs.10 each. The CCDs are recorded in the financial statements in INR. The CCDs were also subsequently repaid in INR. The true copy of the statement setting out the details of payment and demand deposit transaction clearly demonstrate that the remittance is in INR. 8.6.1 The TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized as a loan. The relevant finding of the Tribunal reads as follows:- "8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, following the principles laid down by the Coordinate Benches and the Hon 'ble High Court as relied on by the assessee in the submissions, we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically, categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31-08-2012 (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely, against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The ITA No.2209/Bang/2016 Page 9 of 25 following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated. i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum12014; ii, CIT Vs. Cotton Naturals (I) Ltd., ITA No. 23312014 (Deli-HC); iii. M/s. Brahma Center Development Pvt. Ltd., Vs. [TO, ITA No. 3 73/Del/2016 (ITA T Del). By respectfully following the Co-ordinate Bench and Hon 'ble High Court decisions, we agree with the assessee 's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case." 8.6.2 The Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Put. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- “39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central ITA No.2209/Bang/2016 Page 10 of 25 bank, mandate of the Government and several other parameters. Interest rates payable on currency specfic loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- “The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lenders State or that in the borrowers is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), re 1 § AStG). A differentiation between debt- claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in ITA No.2209/Bang/2016 Page 11 of 25 dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogal appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also tobe repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply." 8.6.3 In the instant case, admittedly, the CCDs are issued in JNR, interest is paid in INR and CCD's are ITA No.2209/Bang/2016 Page 12 of 25 repaid also in INR. Therefore, placing reliance on the judgment of the Honble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. 18. Respectfully following the decision of the coordinate bench of the Bangalore Tribunal we uphold the TP study done by the assessee to arrive at the interest rate of 9% and 12% calculated based on the average rupee cost comparing the same with SBI prime lending rate. The assessee’s claim in this ground is allowed 19. The next issue is on the disallowance of expenditure u/s 14A r.w Rule 8D. 20. The ld.AR submitted that this issue is also covered in assessee’s own case (supra) wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 21. We have heard the Ld DR and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (Supra) has held that - 9.2 We have heard rival submissions and perused the material on record. It is an undisputed fact that the assessee did not earn any exempt income during the year under consideration. It is a settled position that in the absence of any exempt income, no disallowance can be made u/s 14A of the Act. In this context, reliance is ITA No.2209/Bang/2016 Page 13 of 25 placed on the judgment of the Hon’ble jurisdictional High Court in the case of CIT and Anr. v. Quest Global Engineering Services Pvt. Ltd. (supra), wherein it was held as follows:- “14. Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No.5/2014 dated 11.02.2014 is not applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in COMMISSIONER OF INCOME TAX VS. KINGFISHER INVESTMENT INDIA LTD. vide judgment dated 29.09.2020 inter alia held that disallowance under Section 14A read with Rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11.02.2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16.01.2021 passed in I.T.A.No.271/2017 (PRINCIPAL COMMISSIONER OF INCOME TAX VS. NOVEL SOFTWARE DEVELOPMENT) in which it was held that decision of this court in KINGFISHER FIN VEST LTD. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in MAXOPP INVESTMENTS LTD. supra and it was held that the aforesaid decision does not deal with applicability of Section 14A of the Act. However, eventually this court agreed with the view taken by High Court of Madras in CIT VS. CHETTINAD LOGISTICS P LTD., (2017) 80 TAXMANN.COM 221 (MAD.) AND KEM INVEST LTD. VS. CIT, (2015) 16 TAXMANN.COM 118 (DELHI) and ITA No.2209/Bang/2016 Page 14 of 25 held that since no exempt income has accrued to the assessee therefore, the provisions of Section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., KINGFISHER FINVEST INDIA LTD. AND MIS NOVEL SOFTWARE INDIA (P) LTD. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under: It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes upon order to earn profits. In the result, the appeals filed by the revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 15. From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP IN VESTMENT LTD. supra deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of ITA No.2209/Bang/2016 Page 15 of 25 Section 14A in MIS NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same. However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in COMMISSIONER OF INCOME TAX VS. WALFORT SHARE AND STOCK BROKERS (2010) 326 ITR 1 wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in MIS NOVEL SOFTWARE INDIA (P) LTD. is affirmed but for different reasons. It is also clarified by us that while recording the conclusion in KINGFISHER FIN VEST LTD. that disallowance under Section 14A has to be made even taxpayer has not earned any exempt income, this court has misread the ratio of the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent. In view of preceding analysis, the second substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.” 9.3 The Hon’ble Bombay High Court in the case of India Debt Management (P.) Ltd. (supra) has held that when the IT(TP)A No.506/Bang/2016 M/s.Praxair India Private Limited. 15 assessee does not receive ITA No.2209/Bang/2016 Page 16 of 25 any dividend income, no disallowance can be made u/s 14A of the Act. The relevant finding of the Hon’ble High Court of Bombay, reads as follows:- “7. Regarding question (b) -: The issue is no longer res-intigra. The facts are that the assessee had not earned any exempt, income during the year under consideration. As held earlier Delhi High Court which judgment is also followed repeatedly by our Court, in case of Chemvinvest Ltd. v. CIT [2015] 61 taxmann.com 1181234 Taxman 761/375 ITR 33 (Delhi), in such a case disallowance of expenditure under section 14A of the Act would not be permissible. The decision of Delhi High Court was carried in the appeal by the revenue. The SLP has been dismissed by the Supreme Court.” 9.4 In the light of the aforesaid judicial pronouncements, the disallowance made u/s 14A of the Act, ought to be deleted, since the assessee was not in receipt of any exempt income during the relevant assessment year. 9.4 In the light of the aforesaid judicial pronouncements the disallowance made u/s.14A of the Act ought to be deleted, since the assessee was not in receipt of any exempt income during the relevant assessment year 22. Considering the binding effect of the decision of the coordinate bench of the Bangalore Tribunal we allow this ground in favour of the assessee to hold that the disallowance made u/s.14A is to be deleted as the assessee was not in receipt of any exempt income during the relevant assessment year. 23. The next issue for consideration is Disallowance of foreign exchange loss amounting to Rs.20,22,99,856/-. ITA No.2209/Bang/2016 Page 17 of 25 24. The assessee obtained a foreign currency loan from Kelvin Finance Company and the borrowing was to be used for ‘general corporate purposes’. The assessee has obtained an approval from the “Reserve Bank of India (RBI)” for remitting the interest and the principal amount. The RBI vide letter dated 20.05.2003 granted the approval on the terms that the loan had to be utilized only for the purpose for which it is agreed upon i.e. general corporate purposes. The assessee claimed the loss arising out of forex fluctuations against this loan as an expenditure on the premise that the loan is utilized for general corporate purposes. 25. The AO rejected the claim of the assessee saying that the assessse has actually utilized the loan for the repayment of short term borrowings relying on the cash flow statement submitted by the assessee. The DRP did not accept the objections raised by the assessee in this regard and retained adjustment, based on which the AO passed this final order. 26. The Ld.AR during the course of the hearing made the following submissions – i) when the loan is obtained for revenue purposes, the exchange loss arising in connection thereto is allowable as a revenue expenditure placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. (312 ITR 254) ITA No.2209/Bang/2016 Page 18 of 25 ii) disallowance made basis cash flow statement is erroneous, as the cash flow statement, will not reveal the details of utilization of funds i.e. what funds were utilized for what purposes. iii) the Assessing Officer categorically notes that the investment in fixed assets is from surplus cash generated, meaning that the loan was not utilized for purchase of fixed assets. Having clearly held so, the Assessing Officer's finding that the Kelvin Loan is not utilized for working capital purposes is erroneous. iv) it is a settled legal principle that where surplus interest free funds are available, the presumption is that the said funds were utilized for the purposes of investments (CIT v. Reliance Industries Ltd. 401 ITR 466 (SC)). v) the loan was obtained for general corporate working capital purposes as is evident from the loan agreement (pages 2164-2166 of the paper book) and the RBI's approval (pages 2216-2218 of the paper book). vi) since the loan was obtained for working capital purposes, the loss arising on account of fluctuation in foreign currency ought to be allowed as a deduction. Without prejudice, even assuming that the loan was utilized for repayment of other short term loans, such ITA No.2209/Bang/2016 Page 19 of 25 short terms loans having been obtained for working capital requirement, the exchange loss would still be an allowable deduction. vii. in the previous assessment years when the Appellant had realised gains in respect of the said loan, the same were offered to tax, which was accepted by the Revenue. The Revenue having accepted the gains to tax, and thereby having accepted the loans to be obtained for working capital purposes, cannot disallow the loss in the year under consideration. 27. The ld.DR relied on the written submissions. 28. We have heard both the parties and perused the material on record. It is a settled law that if the loan borrowed is utilized for revenue purposes, the forex loss arising against the loan should be allowed as a deduction. The Apex court in the case of CIT vs Woodward Governor (supra) has settled the issue and the coordinate bench of the Bangalore Tribunal has been consistently following the same view. The coordinate bench of the Bangalore Tribunal in the case of ITO vs Levi Strauss (India) Pvt Ltd (ITA Nos. 2547& 2548 / Bang / 2018) has held that 9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on the last date of the previous ITA No.2209/Bang/2016 Page 20 of 25 year. It is no doubt true that there has been no actual payment and at the time of ultimate settlement, there may not be a loss also. Nevertheless, AS - 11 of ICAI requires such liability also to be reflected in the financial statements. The Hon'ble Supreme Court considered all these aspects in the case of CIT(A) Vs. Woodward Governor (2009) 312 ITR (P.) Ltd. (2011) 200Taxman 179. The first aspect examined by the Hon'ble Supreme Court was as to whether the additional liability due to exchange rate fluctuation was a liability. The Hon'ble Supreme Court held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. The Court explained that the word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29 and that Sec. 37(1) has to be read with ss. 28, 29 and 145(1). Therefore, loss suffered by the assessee in respect of a revenue liability ITA Nos.2547 and 2548/Bang/2018 on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Court explained that under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11. An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange. Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period. 10. In the present case, there is no dispute that the outstanding liability was in respect of trade receivables and payables and therefore loss would be on revenue account. In such circumstances, we are of the view that the CIT(A) was justified in allowing the claim made by the assessee. We ITA No.2209/Bang/2016 Page 21 of 25 find no grounds to interfere in the order of the CIT(A). Accordingly, appeal by the Revenue is dismissed. 29. We have perused the RBI approval letter where it is clearly stated that the loan is required to be used only for the purpose for which it is approved that is the general corporate purposes. We are of the considered view that the cash flow statement does not provide any basis to the finding that the amount is used for the repayment of short term loans unless there is a thorough examination is done on the inflows and outflows in the cash flow statement. We also take into consideration the fact that the assessee has offered the forex gain in respect of the same loan in the previous year and in the interest of justice it is only correct when the loss arises out of forex movement the same be allowed. Pursuant to the binding decision of the coordinate bench of the Bangalore Tribunal and based on the facts placed before us we hold that the loss claimed by the assessee due to the forex fluctuation of the loan is to be allowed. This ground is allowed in favour of the assessee 30. The next issue raised by the assessee is with regard to disallowance of expenditure u/s 40a(ia) of the Act for Rs. 5,42,35,783/- 31. During the asst. year 2011-12, the assessee suo moto disallowed a sum of Rs.5,42,35,783/- for non deduction of tax at source u/s 40a(ia). The AO re-characterized the same as a disallowance u/s 37 of the Act in assessee’s own case (Supra). ITA No.2209/Bang/2016 Page 22 of 25 The coordinate bench of this Tribunal remanded the matter back to the AO to examine whether impugned expenditure can be allowed u/s 37 of the Act. The assessee in the year under consideration for this appeal claimed the same amount as deduction on ground that the assessee has actually incurred the expenditure for business purpose and the tax has also been deducted at source wherever applicable. 33. The ld.AR submitted that there is no dispute that the expenditure is incurred for the purpose of business and hence ought to be allowed as a deduction u/s.37 of the Act whether or not the disallowance in the earlier year was u/s. 37 or u/s.40(a). The fact the disallowance in the earlier year was u/s. 37 or u/s.40(a) loses significance once the assessee has actually incurred the expenditure for business purposes and payments have been made after deducting taxes, wherever applicable. Further, if the disallowance made in the earlier assessment year u/s.37 of the Act is sustained, the assessee ought to allowed deduction u/s.37 in the year under consideration as otherwise it would result in double disallowance. 34. The Ld.DR supported the decisions of the lower authorities. 35. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Bangalore Tribunal has remanded this issue back to the AO ITA No.2209/Bang/2016 Page 23 of 25 for the assessment 2011-12 in assessee’s own case. The direction of the Tribunal is reproduced below “12.3 We have heard rival submissions and perused the material on record. The assessee had created a provision for the expenditure incurred for the current assessment year and suo moto disallowed the same as taxes were not deducted. The Assessing Officer held the expenditure is not an admissible expenditure u/s 37 of the Act. The DRP has not adjudicated the issue holding that the objection of the assessee does not arise out of the variation in the returned income. The issue whether the impugned expenditure can be disallowed u/s 37 of the Act has not been dealt with either by the AO nor by the DRP. The A.O. has authority to hold that expenditure (though provision expenditure) is not an allowable deduction u/s 37 of the Act. Only those expenditure otherwise allowable u/s 30 to 38 of the Act is deductible as per proviso to section 40(a)(ia) of the Act. Therefore, any expenditure not for the purpose of business, the A.O. can certainly re-characterize the same as not allowable expenditure u/s 37 of the Act. However, as mentioned earlier, the A.O. nor DRP has not examined whether the said expenditure is allowable business expenditure u/s 37 of the Act. The A.O. held that provision of Rs.5,42,35,783 disallowed by the assessee u/s 40(a)(ia) of the Act cannot be allowed as deduction in the subsequent assessment year, since, the expenditure does not pertain to the subsequent year. The DRP did not adjudicate the issue by observing that there is no variation to the returned income on this count. Therefore, the matter needs to be reconsidered by the AO afresh. It is ordered accordingly.” 36. The Tribunal has given a clear direction that the allowability of the impugned expenditure in 2011-12 or in the year under consideration needs to be reconsidered by the AO afresh. Respectfully following the decision of the coordinate ITA No.2209/Bang/2016 Page 24 of 25 bench of the Bangalore Tribunal we remand the claim of the assessee back to the AO and AO is directed accordingly. The appeal of the assessee on this ground is allowed for statistical purposes. 37. In the result, the appeal of the assessee is allowed Order pronounced in court on 25 th February, 2022 Sd/- Sd/- (GEORGE GEORGE K) ( PADMAVATHY S) Judicial Member Accountant Member Bangalore, Dated, 25 th February, 2022 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore. ITA No.2209/Bang/2016 Page 25 of 25 1. Date of Dictation .......................................... 2. Date on which the typed draft is placed before the dictating Member ......................... 3. Date on which the approved draft comes to Sr.P.S ................................... 4. Date on which the fair order is placed before the dictating Member .................... 5. Date on which the fair order comes back to the Sr. P.S. ....................... 6. Date of uploading the order on website................................... 7. If not uploaded, furnish the reason for doing so ................................ 8. Date on which the file goes to the Bench Clerk ....................... 9. Date on which order goes for Xerox & endorsement.......................................... 10. Date on which the file goes to the Head Clerk ......................... 11. The date on which the file goes to the Assistant Registrar for signature on the order ..................................... 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ............................... 13. Date of Despatch of Order. .....................................................