DCIT, New Delhi V. M/s. Asahi India Glass Ltd., New Delhi

ITA 2501/DEL/2014

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1444 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 14-06-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 23-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHASHI KAJLE SENIOR
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Commercial expediency; Rule 8D; Set aside
• Section: 14A; 115JB; 251; 13; 153; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NOS.2501 /DEL./2014 (ASSESSMENT YEAR : 2008-09) DCIT, CIRCLE 2 (1), VS. M/S. ASAHI INDIA GLASS LIM ITED, NEW DELHI. 12, BASANT LOK, VASANT VIHAR, NEW DELHI. (PAN : AADCA7706R) ITA NOS.1638/DEL./2014 (ASSESSMENT YEAR : 2008-09) M/S. ASAHI INDIA GLASS LIMITED, VS. DCIT, CIRCLE 2 (1), 12, BASANT LOK, VASANT VIHAR, NEW DELHI. NEW DELHI. (PAN : AADCA7706R) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SANDEEP SAPRA, ADVOCATE REVENUE BY : MS. SHASHI KAJLE, SENIOR DR DATE OF HEARING : 04.03.2020 DATE OF ORDER : 14.05.2020 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : PRESENT CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE BEING DISPOSED OFF BY WAY OF COMPOSITE ORDER TO AVOID REPETITION OF DISCUSSION. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 2 2. APPELLANT, DCIT, CIRCLE 2 (1), NEW DELHI (HEREINAFTER REFERRED TO AS THE REVENUE) BY FILING THE PRESENT APPEAL S OUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 03.02.2014 PASSED BY THE L D. COMMISSIONER OF INCOME-TAX (APPEALS)-XX, NEW DELHI IN AN APPEAL CHALLENGING THE ORDERS PASSED BY THE LD. TPO /AO QUA THE ASSESSMENT YEAR 2008-09 ON THE GROUNDS INTER ALIA T HAT :- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LCF CIT(A) HAS ERRED IN DELETING THE ADJU STMENT MADE BY THE TPO WHILE DETERMINING THE ARM'S LENGTH PRICE OF ROYALTY PAID OF RS.2,20,00,000/- CRORES FOR THE TALOJA PLAN T AS NIL INTER ALIA HOLDING THAT THE PLANT HAD RECEIVED PATENTED T ECHNOLOGY AND SUPPORT FOR MANUFACTURING OF FLOAT GLASS FROM ASAHI GLASS COMPANY, JAPAN IN LIEU OF ROYALTY PAYMENT AND NO IN DEPENDENT COMPANY WHICH PROVIDE SUCH SERVICES FREE OF CHARGE. 2. IN DELETING THE ADDITION AMOUNTING TO RS.84,93,6 75/- MADE ON ACCOUNT OF PROVISION FOR GRATUITY TO BOOK P ROFIT AS PER PROVISION OF SECTION 115JB OF THE INCOME TAX ACT 19 61.' 3. APPELLANT, M/S. ASAHI INDIA GLASS LIMITED (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 03.02.2014 PASSED BY THE L D. COMMISSIONER OF INCOME-TAX (APPEALS)-XX, NEW DELHI IN AN APPEAL CHALLENGING THE ORDERS PASSED BY THE LD. TPO /AO QUA THE ASSESSMENT YEAR 2008-09 ON THE GROUNDS INTER ALIA T HAT :- 1. THAT THE LEARNED OT(A) ERRED ON FACTS AND UNDER THE LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.963964/- U/S 14A READ WITH RULE 8D OF THE IT RULES UNDER THE NORMAL PROVISIONS OF THE IT ACT AND U/S 115JB. NO NEXUS BETWEEN THE INTEREST PAID ON BORROWED FUND S AND TAX FREE INCOME WAS ESTABLISHED BY THE AUTHORITIES BELO W. AT ANY RATE WITHOUT PREJUDICE, THE ADDITION AS MADE IS EXCESSIV E. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 3 2. THE LEARNED CIT(A) ERRED ON FACTS AND UNDER THE LAW IN UPHOLDING THE ADDITION OF RS.1670000/- ON ACCOUNT O F MARK TO MARKET LOSS. VARIOUS FACTS, CIRCUMSTANCES AND LEGAL POSITION AS SUBMITTED WERE NOT PROPERLY APPRECIATED. AT ANY RAT E WITHOUT PREJUDICE, THE ADDITION AS MADE IS EXCESSIVE. 3. THAT THE LEARNED CIT(A) ERRED ON FACTS AND UNDE R THE LAW IN NOT ALLOWING DEDUCTION OF RS.390911373/ - ON ACC OUNT OF FOREIGN CURRENCY GAIN OF LOAN TAKEN FOR PURCHASE OF CAPITAL ASSET WITHOUT CONSIDERING THE PROVISIONS U/S 43A OF THE I T ACT. VARIOUS FACTS, CIRCUMSTANCES AND DOCUMENTARY EVIDEN CE AS SUBMITTED WERE NOT PROPERLY APPRECIATED. AT ANY RAT E WITHOUT PREJUDICE, THE ADDITION AS MADE IS EXCESSIVE. 4. THAT THE LEARNED CIT(A) ERRED ON FACTS AND UNDER THE LAW IN DISALLOWING THE PROVISION FOR GRATUITY OF RS.849 3675/ - UNDER THE NORMAL PROVISIONS OF THE IT ACT. AT ANY RATE WI THOUT PREJUDICE, THE ADDITION AS MADE IS EXCESSIVE. THE LEARNED CIT(A) IS WRONG IN STATING THAT THE PRO VISION FOR GRATUITY OF RS.8493675/- HAS BEEN ADDED TO THE TAXA BLE INCOME UNDER NORMAL PROVISION OF THE IT ACT.' 4. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. ASAHI INDIA GLASS LI MITED, THE TAXPAYER WAS ESTABLISHED IN THE YEAR 1987 FOR MANUF ACTURING OF HIGH QUALITY AUTOMOTIVE GLASS FOR THE INDIAN AUTOMO BILE INDUSTRY. SUBSEQUENTLY, THE TAXPAYER ALSO FORAYED INTO MANUFA CTURING OF ARCHITECTURAL AND FLOAT GLASS. DURING THE YEAR UN DER ASSESSMENT, THE TAXPAYER HAD 3 LINES OF BUSINESS VIZ. AUTO GLAS S, FLOAT GLASS AND ARCHITECTURAL GLASS BUT DUE TO LOW SALES VOLUME IN THE ARCHITECTURAL GLASS SEGMENT, THIS SEGMENT WAS AGGREGATED WITH AUT O GLASS DIVISION AND CONSEQUENTLY ORGANIZED ITS BUSINESS IN TO 2 STRATEGIC BUSINESS UNITS OF AUTO GLASS AND FLOAT GLASS. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 4 5. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER WAS AN ASSOCIATE OF ASAHI GLASS COMPANY, JAPAN (AGC JAPAN) WITH THE LATTER HOLDING 22% SHARES OF THE TAXPAYER. AGC JAP AN HAS APPOINTED ONE EXECUTIVE DIRECTOR ON THE BOARD OF TH E TAXPAYER WHICH WAS ALSO CHIEF TECHNICAL OFFICER OF THE TAXPA YER AND AS SUCH, AGC JAPAN WAS CONSIDERED A DEEMED ASSOCIATED ENTERPRISES (AE) OF THE TAXPAYER AND CONSEQUENTLY ALL THE SUBSI DIARY OF AGC JAPAN WERE CONSIDERED AS AE OF TAXPAYER. 6. DURING THE YEAR UNDER ASSESSMENT, TAXPAYER ENTER ED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE AS UNDER :- INTERNATIONAL TRANSACTION AUTO- MOTIVE FLOAT METHOD PURCHASE OF RAW MATERIAL 66.7 - TNMM IMPORT OF STORES & MACHINERY SPARES 8.94 0.076 TNMM IMPORT OF CLEAR FLOAT AND REFLECTIVE GLASS - 4.17 TNMM PURCHASE OF CAPITAL GOODS 44.53 - TNMM IMPORT OF REFRACTORIES BRICKS & MACHINERY - 34.61 TNMM ROYALTY FOR USE OF TECHNICAL KNOW- HOW 4.29 14.65 TNMM FEE FOR TECHNICAL CONSULTANCY SERVICES, REPAIR & MAINTENANCE, EXHIBITION, ENGINEERING SERVICES 3.3 7.15 TNMM COMMISSION INCOME ON SALES - 1.33 TNMM 7. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTIONS USED TRANSACTIONAL NET MARGIN METHOD ( TNMM) WITH ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 5 OPERATING PROFIT/SALES (OP/SALES) ON AN ENTITY-WISE BASIS AS THE PROFIT LEVEL INDICATOR (PLI) AS THE MOST APPROPRIAT E METHOD (MAM), CHOSEN 5 COMPARABLES HAVING MARGIN OF 2.5% A S AGAINST TAXPAYERS MARGIN OF 9.76%. TO DEMONSTRATE ARMS L ENGTH NATURE OF ITS ROYALTY PAYMENT, TAXPAYER HAD ADOPTED COMPAR ABLE RATE FOR SONA KOYA STEERING LTD. AT 3%. HOWEVER, TPO CONSID ERED IT EXPEDIENT TO ANALYZE BOTH THE SEGMENTS VIZ. FLOAT G LASS AND AUTOMOTIVE GLASS SEGMENTS AND CALLED FOR SEGMENTAL RESULT OF THE TAXPAYER COMPANY AND PREFERRED TO APPLY ARMS LENGT H PRICE (ALP) ON A TRANSACTION-BY-TRANSACTION BASIS. LD. T PO IN ORDER TO DETERMINE THE ALP OF ROYALTY PAID OF RS.2,20,00,000 /- NOTICED THAT ALTHOUGH FLOAT GLASS MARGIN OF THE TAXPAYER HAD DIP PED FROM 6.02% TO 4.27% IN FYS 2006-07 & 2007-08 RESPECTIVELY, THE ROYALTY PAYMENT HAS ACTUALLY INCREASED TO RS.3.17 CRORES IN FY 2007-08 AGREEING WITH THE CONTENTIONS RAISED BY THE TAXPAYE R COMPANY, THE LD. TPO EXTENDED BENEFIT OF THE ROYALTY AGREEMENT P ERTAINING TO ROORKEE PLANT. HOWEVER, IN CASE OF TALOJA PLANT OF THE TAXPAYER COMPANY SHOWS OPERATING PROFIT MARGIN OF (-) 0.04% WHICH PROVES THAT LICENCE TECHNOLOGY AVAILED BY THIS PLANT HAS F AILED TO GENERATE ANY ECONOMIC VALUE FOR THE TAXPAYERS BUSINESS AND ORDERED TO REDUCE THE AMOUNT OF RS.2,20,00,000/- TO NIL BY USI NG CUP METHOD IN THE ABSENCE OF ANY EVIDENCE TO SHOW THAT IF ANY BENEFIT HAS ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 6 ACCRUED TO THE TAXPAYER AND THEREBY ENHANCED THE IN COME OF THE TAXPAYER BY RS.2,20,00,000/-. 8. AO MADE A DISALLOWANCE OF RS.9,63,964/- U/S 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 (FO R SHORT THE RULES) UNDER THE NORMAL PROVISIONS OF THE ACT AND U/S 115JB OF THE ACT. AO ALSO MADE ADDITION OF RS.16,70,000/- B Y FOLLOWING THE INSTRUCTION NO.3/2010 DATED 23.03.2010 OF CBDT BY W AY OF MAKING DISALLOWANCE ON ACCOUNT OF MARK TO MARKET BA SIS ON THE GROUND THAT THE SAME HAS BEEN BOOKED AS EXPENDITURE AS FORWARD CONTRACT. AO ALSO MADE ADDITION OF 84,93675/- UNDE R THE NORMAL PROVISIONS OF THE ACT AND ALSO U/S 115JB ON THE GRO UND THAT THE PROVISION MADE BY THE TAXPAYER FOR PAYMENT OF GRATU ITY AS PER GENESIS IS AN ASCERTAINED LIABILITY. 9. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT ( A) BY FILING THE APPEALS WHO HAS GIVEN PART RELIEF. FEELING AGG RIEVED, BOTH THE TAXPAYER AS WELL AS THE REVENUE HAVE COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEALS. 10. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 7 GROUND NO.1 OF REVENUES APPEAL (ITA NO.2501/DEL/2014) 11. UNDISPUTEDLY, THE LD. TPO HAS ACCEPTED ROYALTY OF RS.10.95 CRORES PAID TO GLAVERBEL NEDERLAND BV FOR FLOAT GLA SS MANUFACTURED AT ROORKEE UNIT BUT TAKEN THE ADVERSE VIEW IN CASE OF ITS TALOJA UNIT ON THE GROUND THAT LICENCE TECHNOLO GY AVAILED BY THE TAXPAYER FROM AGC JAPAN HAS FAILED TO GENERATE ANY ECONOMIC VALUE FOR TAXPAYERS BUSINESS AND THEREBY REDUCED T HE AMOUNT TO RS.2,20,00,000/- ON ACCOUNT OF ROYALTY TO NIL BY US ING CUP METHOD. DETAIL OF ROYALTY PAYMENT MADE BY THE TAXP AYER IN ITS FLOAT GLASS DIVISION IS AS UNDER :- PARTICULARS AMOUNT (INR CRORES) PATENT DETAILS FLOAT GLASS (TALOJA) 2.22 4940479 FLOAT GLASS (ROORKEE) 7.16 US 2005/ 0028559 REFLECTIVE GLASS 3.59 US RE 40, 315E MIRROR 0.20 190380 TOTAL 13.17 12. THE DETAIL OF MARGIN OF TAXPAYERS TWO PLANTS, NAMELY, TAJOLA AND ROORKEE PLANTS FOR MANUFACTURE OF FLOAT GLASS IS AS UNDER :- PARTICULARS TALOJA ROORKEE FLOAT GLASS SEGMENT REVENUE - - - EXTERNAL 27,250 22,725 49,975 INTER SEGMENT SALES (NET OF EXCISE DUTY) 1,275 4,445 5,720 TOTAL REVENUE 28,525 27,170 55,695 SEGMENT RESULT - 108 2,240 2,132 OPERATING PROFIT / SALES - 0.40 9.86% 4.27% ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 8 13. IT IS ALSO NOT IN DISPUTE THAT FROM THE TAJOLA PLANT, THE TAXPAYER MAKES AN OPERATING PROFIT MARGIN OF (-) 0. 40% THUS FAILED TO GENERATE ANY ECONOMIC VALUE OF THE LICENSED TECH NOLOGY TO ITS BUSINESS. 14. LD. CIT (A) DELETED THE ADDITION OF RS.2,20,00, 000/- ON ACCOUNT OF ADJUSTMENT MADE BY THE LD. TPO IN ORDER TO DETERMINE THE ALP OF ROYALTY BY RETURNING FOLLOWING FINDINGS :- 11.7 THE APPELLANT HAS HIGHLIGHTED THAT THE ASAHI BRAND AND ASSOCIATED TECHNOLOGY IS QUINTESSENTIAL FOR ITS CON TINUED EXISTENCE AND SUSTENANCE IN THE FLOAT GLASS INDUSTRY. IN THIS CONNECTION, THE APPELLANT HAS SUBMITTED THAT THE TECHNOLOGY AND KNO W-HOW OF FLOAT GLASS IS ONLY RESTRICTED TO ASAHI GLASS, SAIN T GOBAIN AND GUARDIAN. THE APPELLANT HAS ALSO EXPLAINED THAT ALL THE PLAYERS IN THE FLOAT GLASS INDUSTRY WOULD BE LICENSING THE TECHNOLOGY AND KNOW-HOW OF THEIR RESPECTIVE GROUP COMPANIES FOR TH E PRODUCTION AND SALE OF FLOAT GLASS IN ITS REGION. BASED ON THE DISCUSSION HEREINABOVE, IT IS FAIR TO CONCLUDE THAT THERE IS N O MEANINGFUL ANALYSIS/ EVIDENCE PROVIDED BY THE TPO TO HOLD THAT THE ENTIRE ROYALTY PAYMENT SHOULD BE REDUCED TO ZERO. THE APPE LLANT HAS BEEN ABLE TO DEMONSTRATE THAT THE TALOJA PLANT OF T HE APPELLANT HAS RECEIVED PATENTED TECHNOLOGY AND SUPPORT FOR TH E MANUFACTURING OF FLOAT GLASS FROM ASAHL GLASS COMPA NY JAPAN IN LIEU OF ROYALTY PAYMENT AND NO INDEPENDENT COMPA NY WILL PROVIDE SUCH SERVICES FREE OF CHARGE. THE ROYALTY P AYMENTS WERE MADE BY THE APPELLANT FOR AVAILING PATENTED TECHNOL OGY. THE ABOVE BENEFITS DERIVED BY THE APPELLANT ARE CRITICA L TO THE SMOOTH FUNCTIONING OF ITS BUSINESS. CONSIDERING FACTS OF T HE CASE, I AM OF THE VIEW THAT THE ACTION OF THE TPO IN DETERMINING THE ALP OF 'ROYALTY' PAID FOR THE TALOJA PLANT OF THE APPELLAN T AT NIL IS INCORRECT AND UNSUSTAINABLE. ACCORDINGLY THE AO /TP O IS DIRECTED TO DELETE THE ADDITION OF RS. 2.20 CRORES ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT TO ROYALTY F OR THE TALOJA PLANT OF THE APPELLANT. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 9 15. LD. DR FOR THE REVENUE CHALLENGING THE IMPUGNED ADDITION MADE BY THE LD. CIT (A) RELIED UPON THE ORDER PASS ED BY THE TPO AND HAS REFERRED TO PARA 6.2 OF THE TP ORDER. 16. HOWEVER, LD. AR FOR THE TAXPAYER TO REPEL THE A RGUMENTS ADDRESSED BY THE LD. DR FOR THE REVENUE RELIED UPON THE ORDER PASSED BY THE LD. CIT (A) AND CONTENDED THAT THE ID ENTICAL ISSUE WAS DECIDED BY THE LD. CIT (A) IN FAVOUR OF THE TAX PAYER IN AY 2007-08 AND APPEAL FILED BY THE REVENUE HAS ALSO BE EN DISMISSED BY THE TRIBUNAL VIDE ORDER DATED 26.02.2018 PASSED IN ITA NO.2183/DEL/2014, COPY OF ORDER IS AVAILABLE AT PAGES 70 TO 110 OF THE PAPER BOOK. 17. PERUSAL OF THE ORDER DATED 26.02.2018 PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ITA NO.2183/DEL /2014 GOES TO PROVE THAT IDENTICAL ISSUE AS TO DETERMINING ALP OF ROYALTY PAID BY THE TAXPAYER COMPANY FOR ITS TAJOLA PLANT OF THE TAXPAYER AT NIL HAS BEEN DECIDED IN FAVOUR OF THE TAXPAYER BY RETUR NING FOLLOWING FINDINGS :- 46. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE LD. CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BE FORE US. WE FIND THE TPO MADE AN ADDITION RS.4.09 CRORES TO THE TOTAL INCOME OF THE ASSESSEE BY DISALLOWING PAYMENT OF ROYALTY B Y THE ASSESSEE TO ITS AE BEING AT ARMS LENGTH PRICE. WE FIND THE LD. CIT(A) DELETED THE ADDITION MADE BY THE AO/TPO, THE REASON S OF WHICH HAVE ALREADY BEEN REPRODUCED IN THE PRECEDING PARAG RAPHS. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. C IT(A) ON THIS ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 10 ISSUE. WE FIND THE ASSESSEE BEFORE THE TPO HAD GIVE N ANALYSIS OF THE COMPARABLES WITH AN AVERAGE/MEAN MARGIN OF 8.66 %. THE DETAILS OF WHICH ARE AS UNDER :- COMPANY NAME SALES (CR.) TOTAL COST (TC) (CR.) OPERATING PROFIT (OP) (CR.) OP/ SALES %AGE 1) BHARAT GLASS TUBE LTD. 41.36 40.08 0.56 1.35% 2) GUJARAT GUARDIAN LTD. 484.6 3 359.3 125.33 25.86% 3) HINDUSTAN NATIONAL GLASS & INDS. LTD. 596.1 7 531.06 65.11 10.92% 4) SAINT GOBAIN GLASS INDIA LTD. 854.2 8 783.12 71.16 8.33% 5) SEJAL ARCHITECTURAL GLASS LTD. 43.87 39.04 4.83 11.01% 6) TRIVENI GLASS LTD. 106.2 3 112.07 -5.84 -5.50% MEAN/AVERAGE 8.66% 47. THE OPERATING MARGIN OF THE ASSESSEE COMPANY F OR FLOAT GLASS DIVISION WAS SHOWN AT 6.02% WHICH THE TPO HAS REPRODUCED AT PAGE 4 OF HIS ORDER. WE FIND THE TPO IN THE ORDER REJECTED THREE COMPARABLES NAMELY BHARAT GLASS TUBE S LTD., HINDUSTAN NATIONAL GLASS & INDS. LTD. AND TRIVENI G LASS LTD. AS COMPARABLES AND WORKED OUT THE AVERAGE/MEAN OPERATI NG MARGIN OF THREE COMPARABLES AT 15.99%. AFTER COMPARING THE OPERATING MARGIN OF THE FLOAT GLASS DIVISION OF THE ASSESSEE COMPANY AT 6.02%, THE TPO MADE ADDITION OF RS.4.09 CRORES ON T HE GROUND THAT THE ASSESSEE COMPANY HAD NOT DERIVED ANY BENEF IT FROM PAYMENT OF ROYALTY AND DETERMINED THE ARMS LENGTH PRICE OF ROYALTY AT NIL UNDER CUP. WE FIND LD. CIT(A) DELETE D THE ADDITION WHICH HAS BEEN ALREADY BEEN REPRODUCED IN THE PRECE DING PARAGRAPH. WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF THE LD. CIT(A) ON THIS ISSUE. WE FIND THE ASSESSEE COMPANY HAS PAID ROYALTY OF 4.09 CRORES ON NET SALES OF FLOAT GLASS OF RS.238.61 CRORES TO ITS AES WHICH WORKS OUT TO ONLY 1.71% OF THE SALES. WE FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR T HE ASSESSEE THAT DUE TO THE LICENSED TECHNOLOGY MADE AVAILABLE BY TH E AES, THE ASSESSEE COMPANY WAS ABLE TO MAINTAIN QUALITY AND I NCREASE ITS SALES. FOR THE YEAR ENDING MARCH, 2005 THE TURNOVER WAS RS.67,606/- LAKHS WHICH HAS GONE UP TO RS.68,283/- LAKHS FOR THE YEAR ENDING MARCH, 2006 AND RS.87,830/- LAKHS FOR T HE YEAR ENDING MARCH, 2007 AND RS.111,382/- FOR THE ENDING MARCH, ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 11 2008. THIS INDICATES THAT THERE IS HUGE JUMP IN THE TURNOVER BETWEEN THE YEAR 2006 TO 2008 AS COMPARED TO FINANC IAL YEARS 2004-05 AND 2005-06. FURTHER, THE ROYALTY PAID BY T HE ASSESSEE TO AE FOR FLOAT GLASS TECHNOLOGY HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEARS. WE ALSO FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT SINCE THE ASSESSEE IS A PUBLIC LIMITED COMPANY WITH ONLY 22.2 1% SHAREHOLDING BY ITS AE AND INDIAN PROMOTERS HOLDING 33.03% AND THE GENERAL PUBLIC HOLDING 44.76%, THEREFORE, T HE AES WERE NOT IN A POSITION TO WIELD SIGNIFICANT INFLUENCE OV ER ASSESSEES BUSINESS AS ITS PERFORMANCE AND COMMERCIAL EXPEDIEN CY WERE SUBJECT TO INTENSE SCRUTINY BY SHAREHOLDERS OF THE COMPANIES WHICH ARE LISTED ON BSE AND NSE. WE FURTHER FIND TH E REVENUE HAS ACCEPTED THE ROYALTY PAID AT THE RATE OF 3% BY SONA STEERING SYSTEMS LTD. TO ITS AE WHICH IS MUCH MORE THAN 1.71 %. FURTHER, IN THE IMMEDIATELY PRECEDING YEAR 2006-07, THE TRIB UNAL HAD DIRECTED THE TPO TO INCLUDE BHARAT GLASS TUBE LTD. AND TRIVENI GLASS LTD. AS COMPARABLES. IF THESE TWO COMPANIES A RE INCLUDED AS COMPARABLES, THE AVERAGE MARGIN COMES TO 1.39% W HICH IS MUCH LESS THAN THE OPERATING MARGIN OF 6.02% OF THE ASSESSEE COMPANY. 48. WE FIND THE HONBLE DELHI HIGH COURT IN THE CA SE OF CIT VS. EKL APPLIANCES LTD. (SUPRA) HAS HELD THAT THE F INANCIAL HEALTH OF THE ASSESSEE COULD NEVER BE A CRITERION T O JUDGE THE ALLOWABILITY OF AN EXPENSE. THERE WAS NO AUTHORITY FOR THAT. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONST RATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSE OF B USINESS; IT WAS NO CONCERN OF THE TPO TO DISALLOW IT ON ANY EXTRANE OUS REASONING. HE WAS EXPECTED TO EXAMINE THE INTERNATI ONAL TRANSACTION AS HE ACTUALLY FOUND THEM AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPE NDITURE IS NOT WARRANTED. IT HAS FURTHER BEEN HELD THAT IT IS NOT OPEN TO THE TPO TO QUESTION THE JUDGMENT OF THE ASSESSEE AS TO HOW IT SHOULD CONDUCT ITS BUSINESS AND REGARDING THE NECESSITY OR OTHERWISE OF INCURRING THE EXPENDITURE IN THE INTEREST OF ITS BU SINESS. IT IS ENTIRELY THE CHOICE OF THE ASSESSEE AS TO FROM WHOM IT CONTEMPLATES TO SOURCE ITS TECHNOLOGY OR TECHNICAL KNOWHOW AND AS TO WHAT STEPS SHOULD BE TAKEN TO MEET THE COMPET ITION PREVALENT IN THE MARKET AND TO STAVE OFF THE COMPET ITORS. THIS IS THE DOMAIN OF THE BUSINESSMAN AND THE TPO HAS NO SA Y IN THE MATTER. THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PLA CE ITSELF IN THE ARM CHAIR OF BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS THE REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. IN VIEW OF THE ABOVE DISCUSSION AND IN VIEW O F THE DETAILED REASONING GIVING BY THE LD. CIT(A) WHILE DELETING T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER. WE FIND NO INFIRMITY IN THE SAME. ACCORDINGLY, THE ORDER OF THE LD. CIT( A) IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 12 18. SO, FOLLOWING THE ORDER PASSED BY THE COORDINAT E BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2007-08 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT LD. CIT (A) HAS RIG HTLY DELETED THE ADJUSTMENT MADE BY THE LD. TPO WHILE DETERMINING TH E ALP AND ROYALTY PAYMENT OF RS.2,20,00,000/- FOR ITS TAJOLA PLANT AS NIL BECAUSE WHEN IT IS NOT IN DISPUTE THAT THE EXPENDIT URE OR PAYMENT OF ROYALTY HAS BEEN PAID / INCURRED FOR THE PURPOSE OF BUSINESS, IT CANNOT BE DISALLOWED ON THE GROUND THAT IT HAS FAIL ED TO GENERATE ANY ECONOMIC VALUE FOR THE TAXPAYERS BUSINESS. MO REOVER, IT IS NOT THE DUTY OF THE LD. TPO TO ADVISE THE TAXPAYER COMPANY AS TO HOW THE BUSINESS AFFAIRS ARE TO BE RUN. SO, WHEN T HE TAXPAYER HAS SUCCESSFULLY PROVED THAT IT HAS RECEIVED PATENTED T ECHNOLOGY AND SUPPORT FOR THE MANUFACTURING OF FLOAT GLASS FROM A GC JAPAN IN LIEU OF ROYALTY PAYMENT, THE SAME CANNOT BE DISALLO WED ON THE BASIS OF CONJECTURES AND SURMISES. SO, LD. CIT (A) HAS R IGHTLY DELETED THE ADDITION MADE BY THE AO/TPO, HENCE GROUND NO.1 OF R EVENUES APPEAL IS DETERMINED AGAINST THE REVENUE. GROUND NO.2 OF REVENUES APPEAL (ITA NO.2501/DEL/2014) 19. LD. CIT (A) DELETED THE ADDITION OF RS.84,93,67 5/- MADE BY THE AO ON ACCOUNT OF PROVISION FOR GRATUITY TO BOOK PROFIT U/S 115JB OF THE ACT. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 13 20. LD. DR FOR THE REVENUE BY RELYING UPON THE ORDE R PASSED BY THE AO CONTENDED THAT WHEN THE PROVISION FOR GRATUI TY HAS BEEN MADE ON THE BASIS OF ACTUARIAL AND ACTUAL PAYMENT O F GRATUITY IS DEFERRED TO A LATER DATE ON THE HAPPENING OF A CERT AIN EVENT, NAMELY, DEATH OR VOLUNTARY RETIREMENT OF THE EMPLOYEES WHIC H ARE UNASCERTAINED EVENTS, THE PROVISIONS MADE BY THE TA XPAYER IS FOR ASCERTAINED LIABILITY, AO HAS RIGHTLY ADDED BACK TH E SAME TO THE BOOK PROFIT OF THE TAXPAYER U/S 115JB OF THE ACT. 21. HOWEVER, ON THE OTHER HAND, LD. AR FOR THE TAXP AYER CONTENDED THAT THIS ISSUE HAS ALSO BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE TAXPAYER BY DISMISSING THE APPEAL FIL ED BY THE REVENUE IN AY 2007-08 IN ITA NO.2183/DEL/2014 VIDE ORDER DATED 26.02.2018. 22. UNDISPUTEDLY, IDENTICAL ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2007-08 (SUPRA) BY RETURNING FOLLOWING FINDINGS :- 52. AFTER HEARING BOTH THE SIDES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A). IT IS AN ADMITTED F ACT THAT THE PROVISION FOR SUCH GRATUITY WAS MADE ON THE BASIS O F ACTUARIAL VALUATION WHICH EVEN HAS BEEN ACCEPTED BY THE ASSES SING OFFICER. THE ONLY GRIEVANCE OF THE ASSESSING OFFICER IS THAT SINCE THE ACTUAL PAYMENT OF THE GRATUITY IS DEFERRED TO A LAT ER DATE ON THE HAPPENING OF CERTAIN EVENTS NAMELY DEATH OR VOLUNTA RY RETIREMENT OF THE EMPLOYEE WHICH ARE UNCERTAIN EVEN TS, THEREFORE, SUCH PROVISION IS AS AN UNASCERTAINED LIABILITY. HO WEVER, THE VARIOUS BENCHES OF THE TRIBUNAL ARE CONTINUOUSLY AN D CONSISTENTLY HOLDING THAT WHEN THE PROVISION FOR GR ATUITY IS BEING MADE ON THE BASIS OF ACTUARIAL VALUATION, IT CANNOT BE SAID TO BE ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 14 AN UNASCERTAINED LIABILITY AND ADDED IN TERMS OF CL AUSE (C) TO EXPLANATION (1) TO SECTION 115JB OF THE I.T. ACT. 53. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CI T VS. ECHJAY FORGINGS PRIVATE LIMITED REPORTED IN 251 ITR 15 HAS HELD THAT SINCE PROVISION FOR GRATUITY WAS MADE ON THE B ASIS OF ACTUARIAL VALUATION, IT WAS AN ASCERTAINED LIABILIT Y AND THE SAID AMOUNT WOULD NOT BE ADDED TO THE NET PROFITS. SIMIL AR VIEW HAS BEEN HELD BY THE INDORE BENCH OF THE TRIBUNAL IN TH E CASE OF EICHER MOTORS LTD. VS. DCIT REPORTED IN 82 TTJ 61. THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR TH E ASSESSEE ALSO SUPPORT ITS CASE. IN VIEW OF THE ABOVE AND IN ABSEN CE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE LD. DR AGAINST THE ORDER OF THE LD. CIT(A), WE DO NOT FIND ANY INFIRMI TY IN THE SAME. ACCORDINGLY, THE ORDER OF THE LD. CIT(A) ON THIS IS SUE IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 23. FOLLOWING THE ORDER PASSED BY THE COORDINATE BE NCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE, WE ARE OF THE CONS IDERED VIEW THAT BY NOW, IT IS SETTLED PROPOSITION OF LAW THAT WHEN PROVISION FOR GRATUITY IS BEING MADE ON THE BASIS OF ACTUARIAL VA LUATION, IT CANNOT BE SAID TO BE AN UNASCERTAINED LIABILITY AND ADDED IN TERMS OF CLAUSE (C) OF SECTION 115JB OF THE ACT AND AS SUCH, THE SA ID AMOUNT WOULD NOT BE ADDED TO THE NET PROFIT. SO, WE FIND NO ILL EGALITY OR PERVERSITY IN THE DELETION MADE BY THE LD. CIT (A), HENCE GROUND NO.2 OF REVENUES APPEAL IS DELETED. GROUND NO.1 OF ASSESSEES APPEAL (ITA NO.1638/DEL/2014) 24. AO BY INVOKING THE PROVISIONS CONTAINED U/S 14A READ WITH RULE 8D MADE A DISALLOWANCE OF RS.9,63,964/- UNDER THE NORMAL ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 15 PROVISIONS OF THE ACT AS WELL AS U/S 115JB OF THE A CT WHICH HAS BEEN CONFIRMED BY THE LD. CIT (A). 25. LD. AR FOR THE TAXPAYER CHALLENGING THE IMPUGNE D ORDER PASSED BY THE LD. CIT (A) CONTENDED THAT SINCE THE TAXPAYER HAS SUO MOTU DISALLOWED AN AMOUNT OF RS.2,96,016/- U/S 14A OF THE ACT ON ACCOUNT OF EXPENSES INCURRED TO EARN THE DIVIDEND I NCOME OF RS.7,47,820/-, NO FURTHER DISALLOWANCE CAN BE MADE AS THE AO HAS NOT RECORDED ANY SATISFACTION IF THE WORKING GIVEN BY THE TAXPAYER IS NOT CORRECT AND RELIED UPON THE DECISIONS RENDER ED BY HONBLE SUPREME COURT IN GODREJ & BOYCE CO. LTD. VS. DCIT 3 94 ITR 449 AND HONBLE DELHI HIGH COURT IN THE CASES OF CIT VS. TAIKISHA ENGINEERING INDIA LTD. 370 ITR 338, CIT VS . HERO MANAGEMENT SERVICE LTD. 360 ITR 68 AND MAXOPP INVES TMENT LTD. VS. CIT 347 ITR 272. 26. LD. AR FOR THE TAXPAYER FURTHER CONTENDED THAT THE ISSUE AS TO THE SIMILAR DISALLOWANCE MADE IN THE PRECEDING YEAR FOR 2007-08 HAS BEEN RESTORED TO THE AO BY THE TRIBUNAL VIDE ORDER DATED 26.02.2018 (SUPRA). KEEPING IN VIEW THE REQUEST MADE BY THE LD. AR FOR THE TAXPAYER, WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE IS ALSO REQUIRED TO BE RESTORED TO AO TO DECIDE AFRESH IN VIEW OF THE DECISION RELIED UPON BY THE LD. AR FOR THE TAXPAYE R REFERRED IN THE PRECEDING PARAS. SO, THIS GROUND IS ALLOWED FOR ST ATISTICAL PURPOSES. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 16 GROUND NO.2 OF ASSESSEES APPEAL (ITA NO.1638/DEL/2014) 27. LD. CIT (A) CONFIRMED THE ADDITION OF RS.16,70, 000/- MADE BY THE AO ON THE GROUND THAT THE TAXPAYER HAS FAILE D TO EXPLAIN AS TO HOW THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. 312 ITR 254 IS APPLICABLE TO THIS FACT BUT WITHOUT RETURNING ANY FINDING ON FACT S. 28. UNDISPUTEDLY, THE TAXPAYER BROUGHT ON RECORD TH E FACT THAT VIDE LETTER DATED 21.11.2011, AVAILABLE AT PAGES 13 1 TO 135 OF THE PAPER BOOK, THAT THE TAXPAYER HAS ENTERED INTO FORW ARD CONTRACTS TO HEDGE ITS EXPOSURE AGAINST FOREIGN CURRENCY FLUCTUA TION RISKS TOWARDS OUTSTANDING EXPORT RECEIPTS AND ECBS, ENTIR E DETAILS AVAILABLE AT PAGE 131 OF THE PAPER BOOK, AND THE EN TIRE CONTRACTS REMAINED UNMATURED AS ON 31.03.2008 BUT DUE TO FORE IGN EXCHANGE FLUCTUATION, THE TAXPAYER EARNED MARK TO MARKET (MT M) GAIN OF RS.27,30,000/- AND MTM LOSS OF RS.16,70,000/- ON FO RWARD CONTRACTS RESULTING IN NET MTM GAIN OF RS.10,60,000 /- WHICH WAS DECLARED AS TAXPAYER INCOME OF THE TAXPAYER COMPANY . 29. UNDISPUTEDLY, FOREIGN CURRENCY FLUCTUATION IS A COMMERCIAL EXPEDIENCY AND NECESSITY. THE TAXPAYER GAVE DETAIL OF FORWARD CONTRACT OUTSTANDING AS ON 31.03.2008 IN NOTES TO T HE ACCOUNTS OF ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 17 THE AUDITED BALANCE SHEET, AVAILABLE AT PAGE 112 OF THE PAPER BOOK AS UNDER :- CURRENCY EXCHANGE NOS. USD LAKHS A) NUMBER OF BUY CONTRACTS 1 B) AGGREGATE AMOUNT 40 C) NUMBER OF SELL CONTRACTS 6 D) AGGREGATE AMOUNT 60 30. AO DISALLOWED THE GROSS MTM LOSS OF RS.16,70,00 0/- BY RELYING UPON INSTRUCTION NO.3/2010 DATED 23.03.2010 BY TREATING MTM LOSS AS A NOTIONAL LOSS BEING CONTINGENT IN NAT URE. 31. COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. BANK OF BAHRAIN & KUWAIT 132 TTJ 505 DECIDED THE IDENTICAL ISSUE BY RETURNING FOLLOWING FINDINGS :- 56. THE CONTROVERSY STANDS NOW RESOLVED IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD., 116 ITR 1 (SC), WHEREIN, IT HAS BEEN HELD THA T FLUCTUATION ON ACCOUNT OF FOREIGN EXCHANGE RATE IS AN ALLOWABLE DEDUCTION AND IS NOT CAPITAL IN NATURE. THE OBSERVATION OF TH E HONBLE SUPREME COURT IS AS UNDER:- THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SE TTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOR EIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CUR RENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING P ROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSE E ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A C APITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOUL D BE OF CAPITAL NATURE(EMPHASIS SUPPLIED) 57. AT THE END WE MAY FURTHER OBSERVE THAT WHEN PRO FITS ARE BEING TAXED BY THE DEPARTMENT IN RESPECT OF SUCH UN MATURED FORWARD FOREIGN EXCHANGE CONTRACTS THEN THERE WAS N O REASON TO ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 18 DISALLOW THE LOSS AS CLAIMED BY ASSESSEE IN RESPECT OF SAME CONTRACTS ON THE SAME FOOTING. IN THIS REGARD, WE M AY REFER TO THE DETAILS FURNISHED BY ASSESSEE VIDE THEIR LETTER DT. AUGUST 05, 2010 TO ESTABLISH THAT THE DEPARTMENT HAS ASSESSED THE B ANK IN RESPECT OF THE PROFIT SHOWN BY THE BANK ON RESTATEMENT OF O UTSTANDING FORWARD FOREIGN EXCHANGE CONTRACTS FOR A.YS.2002-03 AND 2003- 04. THERE IS NO DISPUTE ON THIS COUNT AND, THEREFOR E, WE REFRAIN FROM REFERRING THE DETAILS. 58. IN VIEW OF THE ABOVE DISCUSSION, WE ALLOW THE A SSESSEES APPEAL FOR THE FOLLOWING REASONS:- I) A BINDING OBLIGATION ACCRUED AGAINST THE ASSESSE E THE MINUTE IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE CANNOT BE DISREGARDED ONLY ON THE GROUND THAT A BETTER METHOD COULD BE ADOPTED. III) THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SA ME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH 31. IV) A LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REASONABLE CERTAINTY. THE CONSIDERATIONS FOR ACCOUNTING THE INCOME ARE ENTIRELY ON DIFFERENT FOOTING. V) AS PER AS-11, WHEN THE TRANSACTION IS NOT SETTL ED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD. VI) THE FORWARD FOREIGN EXCHANGE CONTRACTS HAVE AL L THE TRAPPINGS OF STOCK-IN-TRADE. VII) IN VIEW OF THE DECISION OF HONBLE SUPREME CO URT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P.LTD., THE ASSESSEES CLAIM IS ALLOWABLE. VIII) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENU E EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFI T. 59. WE, ACCORDINGLY, HOLD THAT WHERE A FORWARD CONT RACT IS ENTERED INTO BY THE ASSESSEE TO SELL THE FOREIGN CU RRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LA ST DATE OF ACCOUNTING PERIOD, THE LOSS IS INCURRED TO THE ASSE SSEE ON ACCOUNT OF EVALUATION OF THE CONTRACT ON THE LAST DATE OF T HE ACCOUNTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORW ARD CONTRACT. ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 19 32. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW INTE R ALIA THAT WHEN MTM GAIN OF RS.10,60,000/- IS BEING TAXED BY THE DE PARTMENT IN RESPECT OF SUCH UNMATURED FORWARD FOREIGN EXCHANGE CONTRACTS THEN THERE WAS NO GROUND TO DISALLOW THE LOSS AS CLAIMED BY THE TAXPAYER IN RESPECT OF THE SAME CONTRACTS ON THE SAME FOOTIN G. THE ENTIRE DETAIL IS THERE ON RECORD. EVEN OTHERWISE, THE OBL IGATION ACCRUED AGAINST THE TAXPAYER THE MINUTE IT ENTERED INTO FOR WARD FOREIGN EXCHANGE CONTRACTS. SO, THE FORWARD FOREIGN EXCHAN GE CONTRACTS DEBITED TO THE PROFIT & LOSS ACCOUNT ARE ALLOWABLE ONE BEING THE LIABILITY HAVING BEEN CRYSTALLIZED WHEN A PENDING O BLIGATION ON THE DATE OF BALANCE SHEET IS DETERMINABLE WITH REASONAB LE CERTAINTY. SO, WE ARE OF THE CONSIDERED VIEW THAT DISALLOWANCE OF RS.16,70,000/- IS LIABLE TO BE DELETED, HENCE DELET ED. GROUND NO.2 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.3 OF ASSESSEES APPEAL (ITA NO.1638/DEL/2014) 33. LD. CIT (A) CONFIRMED THE DISALLOWANCE OF RS.39,09,11,373/- ON ACCOUNT OF FOREIGN CURRENCY GA IN ON THE GROUND THAT TAXPAYER DID NOT FURNISH ANY SUPPORTING DOCUMENT IN RESPECT OF ITS CLAIM TO PROVE THAT THE GAIN OF REIN STATEMENT OF LIABILITY OF FOREIGN CURRENCY LOAN EXTERNAL COMME RCIAL ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 20 BORROWING TAKEN FOR ACQUIRING CAPITAL GOODS BY APPL YING THE PROVISIONS CONTAINED U/S 43A OF THE ACT. 34. UNDISPUTEDLY, THE TAXPAYER HAS RAISED EXTERNAL COMMERCIAL BORROWINGS (ECB) OF US $ 153 MILLION DURING THE AY 2006-07 WHICH WERE UTILIZED FOR IMPORTING THE MACHINERY AND PAYMENT THEREOF WAS TO BE MADE PRIMARILY AFTER 3 YEARS MEAN ING THEREBY NO PAYMENT IN RESPECT OF SUCH ECB WAS MADE DURING THE YEAR UNDER ASSESSMENT AND AS SUCH, THE SAME WAS REINSTATED AT THE FOREIGN CURRENCY RATE AS ON 31.03.2008. THE TAXPAYER HAS D ULY GIVEN THE BREAK-UP OF FOREIGN CURRENCY GAIN OF RS.52,43,15,37 1/- IN PARA 13 OF LETTER DATED 21.11.2011, AVAILABLE AT PAGES 131 TO 135 OF THE PAPER BOOK, WHICH INCLUDES GAIN IN QUESTION OF RS.3 9,08,11,373/- OF REINSTATEMENT OF ECB LOANS. 35. LD. AR FOR THE TAXPAYER RELIED UPON THE NOTIFIC ATION DATED 07.12.2016 ISSUED BY THE MINISTRY OF COMPANY AFFAIR S VIDE WHICH AMENDMENT WAS MADE TO AS-11, COPY OF WHICH IS AVAIL ABLE AT PAGES 197 TO 200 OF THE PAPER BOOK, THE EXCHANGE DI FFERENCE ON ECB WAS HITHERTO TO BE INCREASED/REDUCED FROM THE C OST OF FIXED ASSETS WERE TO BE SHOWN AS INCOME/LOSS IN THE PROFI T & LOSS ACCOUNT. THIS AMENDMENT CAME INTO EFFECT IN RESPEC T OF ACCOUNTING PERIODS COMMENCING ON OR AFTER THE PUBLICATION OF T HESE ACCOUNTING STANDARDS. IN OTHER WORDS, THE AMENDMENT WAS EFFEC TED FROM FY ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 21 2007-08 RELEVANT TO AY 2008-09, THE YEAR UNDER ASSE SSMENT. CONSEQUENTLY, THE TAXPAYER CREDITED FOREIGN CURRENC Y GAIN OF RS.39,08,11,373/- TO THE P&L ACCOUNT AS IS EVIDENT FROM THE NOTES TO ACCOUNT OF THE AUDITED BALANCE SHEET FOR THE YEA R UNDER ASSESSMENT, AVAILABLE AT PAGE 70 OF THE PAPER BOOK, WHICH IS EXTRACTED AS UNDER :- PURSUANT TO ACCOUNTING STANDARD (AS)-11 NOTIFIED A S PART OF COMPANIES (ACCOUNTING STANDARDS), RULES 2006 EXCHAN GE RATE FLUCTUATIONS ARISING ON LOANS/LIABILITIES INCURRED FOR ACQUISITION OF FIXED ASSETS (OTHER THAN CAPITAL PROJECTS UNDER PROGRESS) ARE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT WHICH WER E HITHERTO CAPITALIZED. DUE TO ABOVE CHANGE, THE PROFIT FOR TH E YEAR IS HIGHER BY RS. 39.08 LAC. 36. SO, IN VIEW OF AS-11 AND SECTION 43A OF THE ACT , FOREIGN CURRENCY GAIN OF RS.39,08,11,373/- ON ACCOUNT OF FL UCTUATION BEING NOTIONAL GAIN WAS CREDITED TO P&L ACCOUNT AND REDUC ED FROM TAXABLE INCOME AS THE SAME COULD NOT BE CONSTRUED A S REAL INCOME. 37. THE COORDINATE BENCH OF THE TRIBUNAL IN THE CAS E OF VODAFONE EAST LTD. & ORS. VS. ACIT 156 ITD 337 BY RELYING UPON THE DECISION RENDERED BY HONBLE SUPREME COURT IN C ASE OF CIT VS. WOODWARD GOVERNOR OF INDIA PVT. LTD. 312 ITR 254 DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE TAXPAYER BY RETURN ING FOLLOWING FINDINGS :- WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIALS AVAILABLE ON RECORD. THE FACTS STATED HEREINABOVE ARE UNDISPUTED. THERE IS NO DISPUTE THAT THE PROVISIONS OF SECTION 43A OF THE ACT WOULD BECOME APPLICABLE FOR RECOGNIZING THE EXCHANGE FLUCTUATION IF THE LOAN WAS OBTAINED FOR ACQUISITIO N OF FIXED ASSETS ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 22 ONLY AT THE TIME OF MAKING PAYMENT AND ACCORDINGLY THE EXCHANGE GAIN, IF ANY, WOULD GO TO REDUCE THE COST OF THE FIXED ASSET. SINCE IN THE INSTANT CASE, THE EXCHANGE GAIN IS DERIVED ONLY ON A NOTIONAL BASIS AND IS UNREALIZED, BY APPLYING THE PROVISIONS OF SECTION 43A OF THE ACT, THE SAID GAIN NEEDS TO B E REDUCED FROM THE TAXABLE INCOME. WE ALSO FIND THAT THE LEARNED A SSESSING OFFICER HAVING ACCEPTED TO THE FACTS OF THE CASE AN D THE RELEVANT PROVISION OF THE INCOME TAX ACT IN HIS REMAND REPOR T, OUGHT NOT TO HAVE COME ON APPEAL BEFORE US ON THIS ISSUE. WE ALSO FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF THE SUPREM E COURT IN THE CASE OF CIT VS WOODWORD GOVERNOR OF INDIA P LTD REP ORTED IN 312 ITR 254 (SC) WHEREIN THE PRINCIPLES WERE LAID D OWN FOR RECOGNITION OF EXCHANGE GAIN/LOSS UNDER VARIOUS CIR CUMSTANCES. RESPECTFULLY FOLLOWING THE PROVISIONS OF THE ACT AN D THE DECISION OF THE APEX COURT, WE ARE NOT INCLINED TO INTERFERE WITH THE DECISION OF THE LEARNED CIT(APPEALS). ACCORDINGLY, THE GROUND NO. 1 RAISED BY THE REVENUE IS DISMISSED. 38. SO, FOLLOWING THE ORDER PASSED BY THE COORDINAT E BENCH OF THE TRIBUNAL ON IDENTICAL FACTS, THE ADDITION OF RS .39,08,11,373/- ON ACCOUNT OF REINSTATEMENT OF FOREIGN CURRENCY LOAN I S NOT SUSTAINABLE, HENCE ORDERED TO BE DELETED. SO, GROU ND NO.3 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.4 OF ASSESSEES APPEAL (ITA NO.1638/DEL/2014) 39. LD. CIT (A) CONFIRMED THE DISALLOWANCE OF RS.84 ,93,675/- ON ACCOUNT OF PROVISION FOR GRATUITY UNDER THE NORM AL PROVISIONS ON THE GROUND THAT GRATUITY AMOUNTING TO RS.84,93,675/ - HAS BEEN ADDED TO THE TAXABLE INCOME UNDER THE NORMAL PROVIS IONS OF THE ACT. WE ARE OF THE CONSIDERED VIEW THAT WHEN PROVI SIONS OF GRATUITY HAS BEEN MADE ON ACCRUAL BASIS IT IS NOT A N UNASCERTAINED LIABILITY RATHER AN ASCERTAINED LIABILITY WHICH ASP ECT HAS NOT BEEN ITA NO.1638/DEL./2014 ITA NO.2501/DEL./2014 23 EXAMINED BY THE LD. CIT (A), SO THE ISSUE IS REMAND ED BACK TO THE LD. CIT (A) TO DECIDE AFRESH ACCORDINGLY AFTER PROV IDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER, IN VIEW OF THE ORDER DATED 26.02.2018 PASSED BY THE TRIBUNAL IN TAXPAYER S OWN CASE FOR AY 2007-08 IN ITA NO.1637/DEL/2014. SO, GROUND NO. 4 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICA L PURPOSES. 40. RESULTANTLY, THE APPEAL FILED BY THE REVENUE BE ARING ITA NO.2501/DEL/2014 IS DISMISSED AND THE APPEAL FILED BY THE TAXPAYER BEARING ITA NO.1638/DEL/2014 IS ALLOWED FO R STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 14 TH DAY OF MAY, 2020. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 14 TH DAY OF MAY, 2020. TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.