Intervet India Private Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 721/PUN/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 6913 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-12-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 11-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NIRUPAMA KOTRU
• Assessee Lawyers: DANESH BAFNA
• Keywords: Transfer pricing; Business expenditure; International transaction; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURV EDI, AM . / ITA NO.721/PUN/2014 / ASSESSMENT YEAR : 2003-04 INTERVET INDIA PRIVATE LIMITED, BRIAHNAGAR, OFF PUNE NAGAR ROAD, WAGHOLI, PUNE 412 207 . / APPELLANT PAN: AAACH1671F VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE . RESPONDENT . / ITA NO. 800/PUN/2014 / ASSESSMENT YEAR : 2003-04 DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE . / APPELLANT VS. INTERVET INDIA PRIVATE LIMITED, BRIAHNAGAR, OFF PUNE NAGAR ROAD, WAGHOLI, PUNE 412 207 . RESPONDENT PAN: AAACH1671F ASSESSEE BY : SHRI DANESH BAFNA REVENUE BY : SMT. NIRUPAMA KOTRU, CIT-DR DATE OF HEARING : 19.12.2017 / DATE OF PRONOUNCEMENT: 21.12.2017 / ORDER PER SUSHMA CHOWLA, JM: THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REV ENUE ARE AGAINST ORDER OF CIT(A)-IT/TP, PUNE, DATED 22.01.2014 RELATING TO ASSESSMENT YEAR 2003-04 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 2 2. THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ASSESSEE IN ITA NO.721/PUN/2014 HAS RAISED T HE FOLLOWING GROUNDS OF APPEAL: 1. GROUND NO 1 ON THE FACT AND CIRCUMSTANCES OF THE CASE, AND IN L AW, THE LD CIT(A), ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF R S. 2,13,58,654 TO THE TOTAL INCOME OF THE APPELLANT, ON ACCOUNT OF THE TRANSFER PRICIN G ('TP') ADJUSTMENT UNDER SECTION 92CA(3) OF THE INCOME-TAX ACT, 1961 ('THE ACT') BY HOLDING THAT THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS' DOES NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. THE APPELLANT PRAYS THAT THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS AS COMPUTED BY THE APPELLA NT BE ACCEPTED AND CONSEQUENTLY THE TP ADJUSTMENT OF RS 2,13,58,654 BE DELETED. 2. GROUND NO 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A), ERRED BOTH ON FACTS AND IN LAW, BY CONSIDERING COMPARABLE UNCO NTROLLED PRICE ('CUP') AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S L ENGTH PRICE OF EXPORT OF FINISHED GOODS, AND THEREBY DISREGARDING TRANSACTIO NAL NET MARGIN METHOD ('TNMM'), WHICH WAS BASED ON A DETAILED BENCHMARKIN G ANALYSIS CONDUCTED BY THE APPELLANT. THE APPELLANT PRAYS THAT THE BENCHMARKING ANALYSIS AS CONDUCTED BY THE APPELLANT BE ACCEPTED, AND TNMM METHOD AS CONSIDERED BY THE A PPELLANT BE ADOPTED TO COMPUTE THE ARM'S LENGTH PRICE OF THE TRANSACTION O F EXPORT OF FINISHED GOODS, INSTEAD OF CUP METHOD AS ADOPTED BY THE LD. CIT(A). 3. GROUND NO 3 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A) ERRED IN ASSUMING THAT THE TRANSACTIONS ARE COMPARABLE FOR A PPLICATION OF CUP METHOD, DESPITE THE FACT THAT ADJUSTMENT FOR GEOGRAPHICAL D IFFERENCES COULD NOT BE QUANTIFIED. THE APPELLANT PRAYS THAT IN CASE REASONABLY ACCURAT E ADJUSTMENTS CANNOT BE MADE TO ELIMINATE THE DIFFERENCES BETWEEN INTERNATI ONAL TRANSACTION OF EXPORT OF FINISHED GOODS AND THE COMPARABLE UNCONTROLLED TRAN SACTIONS, THE APPLICATION OF CUP METHOD FAILS, AND TNMM OUGHT TO BE CONSIDERED A S THE MOST APPROPRIATE METHOD. 4. GROUND NO 4 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A) ERRED IN NOT ALLOWING ECONOMIC ADJUSTMENTS WHICH WERE GRANTED BY THE LD. CIT(A) FOR AY 2002- 03 ON THE SAME FACTS. ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 3 THE APPELLANT PRAYS THAT IN CASE CUP METHOD IS CONS IDERED AS THE MOST APPROPRIATE METHOD, THEN ECONOMIC ADJUSTMENTS GRANT ED BY THE LD. CIT(A) FOR A Y 2002-03 ALSO OUGHT TO BE GRANTED. 5. GROUND NO 5 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) ERRED IN DISREGARDING THE FACT THAT THE SALE PRICE REALISED BY THE AES ON SALES MADE TO THIRD PARTIES IN THEIR COUNTRY WAS LESSER THAN THE PRICE AT WHICH THE PRODUCT IS SOLD BY THE APPELLANT TO THIRD PARTIES LOCATED IN OTHER COUNTRI ES. THE APPELLANT PRAYS THAT IN CASE CUP METHOD IS CONS IDERED AS THE MOST APPROPRIATE METHOD, THEN THE TP ADJUSTMENT, IF ANY, OUGHT TO BE MADE WITH REFERENCE TO THE ULTIMATE SELLING PRICE AT WHICH TH E PRODUCT IS SOLD BY THE AES TO THE THIRD PARTIES. 4. THE REVENUE IN ITA NO.800/PUN/2014 HAS RAISED TH E FOLLOWING GROUNDS OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE: - 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN DELETING THE ADDITION OF RS. 68,09,485/- ON ACCOUNT OF CURRENCY EXCHANGE LOSS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT C ONSIDERING THE FACT THAT THE PERIOD OF LOAN WAS DUE TO EXPIRE ON 30/04/2008 AND THE LOSS INCURRED BY THE ASSESSEE ON RESTATING THE LIABILITY ON FIXED RATE O F CONVERSION OF US DOLLARS HAS TO BE SPREAD OVER THE PERIOD OF LOAN UP TO 30/04/2008. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN DELET ING THE ADDITION OF RS.5,00,000/- MADE ON ACCOUNT OF COMPENSATION PAID TO TERMINATED EMPLOYEE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT C ONSIDERING THE FACT THAT THERE WAS NO VOLUNTARY RETIREMENT SCHEME IN OPERATION DUR ING THE YEAR ELIGIBLE FOR DEDUCTION U/S. 35DDA OF THE INCOME TAX ACT, 1961, H ENCE THE PAYMENT OF RS.5,00,000/- OVER AND ABOVE THE SCHEME WAS TREATED AS CAPITAL EXPENDITURE. 5. THE APPELLANT CRAVES LEAVE TO ADD ALTER OR AME ND ANY OR ALL THE GROUNDS OF APPEAL. 5. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE AT THE OUTSET POINTED OUT THAT THE ISSUE RAISED IN THE APPEAL FILED BY AS SESSEE IS AGAINST THE TRANSFER PRICING ADJUSTMENT OF INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS WHEREIN THE ASSESSEE HAD CLAIMED THAT THE MOST APPROPRIATE METHOD TO BENCHMARK THE SAID TRANSACTION WAS TNMM. HOWEVER, THE ASSESSING OFFICER APPLIED CUP ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 4 METHOD. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT SIMILAR ISSUE HAD ARISEN IN THE CASE OF THE ASSESSE E ITSELF IN ITA NO.720/PUN/2014 RELATING TO ASSESSMENT YEAR 2002-03 AND THE TRIBUNA L VIDE ORDER DATED 18-04-2016, IN VIEW OF VARIOUS DIFFERENCES IN THE T WO TRANSACTIONS, I.E. EXPORT OF FINISHED GOODS AND SALE TO NON-AE PARTIES, HELD THE TNMM AS THE MOST APPROPRIATE METHOD. 6. WE PROCEED TO TAKE UP THE APPEAL OF THE ASSESSEE FIRST WHEREIN GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS GENERAL IN NA TURE WHEREAS THE ISSUE RAISED VIDE GROUNDS OF APPEAL NO. 2 AND 3 IS ON MERITS AS TO WHICH METHOD IS TO BE APPLIED AS MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE OF EXPORT OF FINISHED GOODS. GROUNDS OF APPEAL NO.4 A ND 5 RAISED BY THE ASSESSEE ARE ON WITHOUT PREJUDICE BASIS TO THE ISSUE RAISED IN GROUNDS OF APPEAL NO. 2 AND 3. 7. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS ENGAGED IN ANIMAL HEALTHCARE BUSINESS AND MANUFACTURE AND TRADING OF BIOLOGICAL VACCINES AND VETERINARY PHARMACEUTICAL PRODUCTS. FOR THE YEAR U NDER CONSIDERATION, THE ASSESSEE HAD FURNISHED THE RETURN OF INCOME DECLARI NG TOTAL INCOME OF RS.4,36,59,281/-. THE ASSESSING OFFICER MADE A REF ERENCE UNDER SECTION 92CA(1) OF THE ACT TO DETERMINE THE ARMS LENGTH PRICE OF T HE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE. THE TRANSFER PRICING O FFICER NOTED THAT THE ASSESSEE WAS THE WHOLLY OWNED SUBSIDIARY OF INTERVET HOLDING S B.V. NETHERLANDS. THE ASSESSEE BELONGS TO INTERVET GROUP HEADQUARTERED IN NETHERLANDS. DURING THE YEAR, THE ASSESSEE HAD TWO PRODUCTION CENTRES, LOCA TED AT HYDERABAD AND PUNE. THE HYDERABAD UNIT PRODUCES POULTRY VACCINE AND PIG VACCINE AND THE PUNE UNIT MANUFACTURES PHARMACEUTICALS AND OTHER VETERINARY V ACCINES. THE TOTAL TURNOVER OF THE COMPANY WAS RS.87.10 CRORES. THE PROFIT BEF ORE TAX WAS RS.2.61 CRORES; THE OPERATING PROFIT BEING RS.5.29 CRORES AND THE O PERATING MARGIN ON SALES BEING ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 5 6.07%. THE TRANSFER PRICING OFFICER ALSO NOTED THA T THE GROUP ENTITIES WERE LOCATED IN SINGAPORE, GERMANY, FRANCE, BANGKOK, TUR KEY, AUSTRIA, INDONESIA AND NETHERLANDS. THE RAW MATERIAL WAS MAINLY IMPORTED FROM INTERVET INTERNATIONAL B.V. NETHERLANDS AND INTERVET GERMANY. THE ASSESSE E HAD EXPORTED THE RAW MATERIAL/TRADED GOODS TO GROUP ENTITIES IN FRANCE, AUSTRIA, GERMANY AND BANGKOK. IT IMPORTED TRADED/FINISHED GOODS FROM GROUP ENTITI ES IN GERMANY AND NETHERLANDS. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE ARE ENLISTED AT PAGE 2 OF THE TPOS ORDER. THE ARMS LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTIONS COMPUTED BY THE ASSESSEE WAS SAME AS TRANSACTION VA LUE RECORDED IN THE BOOKS OF ACCOUNT. THE COMPANY HAD USED TNM METHOD BY CON SIDERING THE OPERATING PROFIT MARGIN AS PROFIT LEVEL INDICATOR. 8. THE TRANSFER PRICING OFFICER ON THE PERUSAL OF T HE TP REPORT NOTED THAT IT DEALT WITH FUNCTIONAL ANALYSIS AND ECONOMIC ANALYSI S OF THE INTERNATIONAL TRANSACTIONS. IN THE TP STUDY REPORT, THE FUNCTION AL ANALYSIS AND ECONOMIC ANALYSIS WERE WORKED OUT FOR THE MANUFACTURING FUNC TIONS AND TRADING FUNCTIONS OF THE COMPANY SEPARATELY. THE MANUFACTURING ACTIVITY ENCOMPASSES THE INTERNATIONAL TRANSACTIONS RELATING TO NOT ONLY IMP ORT OF RAW MATERIALS BUT ALSO EXPORT OF FINISHED GOODS. THE TP STUDY REPORT DEAL T WITH THE ISSUE OF IMPORT OF RAW MATERIALS AND THE TRANSFER PRICING OFFICER NOTED TH AT IT DID NOT DISCUSS THE AVAILABILITY/NON-AVAILABILITY OF COMPARABLE UNCONTR OLLED TRANSACTIONS IN RESPECT OF SALE OF MANUFACTURED FINISHED GOODS TO ASSOCIATED E NTERPRISES. ACCORDINGLY, THE ASSESSEE WAS ASKED TO PROVIDE DETAILS OF GOODS AS W ERE SOLD TO THE THIRD PARTIES (AS WERE SOLD TO THE AES), I.E. COMMON GOODS AND TH E ASSESSEE WAS ASKED TO COMPARE THE ASSOCIATED ENTERPRISES SALES PRICE WITH NON-ASSOCIATED ENTERPRISES SALES PRICE. 9. THE ASSESSEE PROVIDED THE DETAILS INCLUDING THE FOB PRICES ON WHICH GOODS WERE SOLD TO THE ASSOCIATED ENTERPRISES AS WELL AS NON-ASSOCIATED ENTERPRISES. ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 6 THE TRANSFER PRICING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAD BENCHMARKED ITS TRANSACTIONS RELATING TO EXPORT OF FINISHED GOO DS TO ITS ASSOCIATED ENTERPRISES AND EXPORT OF RAW MATERIALS TO ITS ASSOCIATED ENTER PRISES, USING TNM METHOD. HOWEVER, IT WAS NOTED THAT THERE WERE SEVERAL INSTA NCES WHERE THE ASSESSEE HAD SOLD SIMILAR GOODS TO ASSOCIATED ENTERPRISES, WHICH IT HAD SOLD TO THIRD PARTIES. THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT D IRECT COMPARABLES WERE AVAILABLE IN THE CASE. THEREFORE, CUP METHOD WAS A PPLICABLE IN THE CASE. THE TRANSFER PRICING OFFICER HELD THAT THE ASSESSEES T RANSACTIONS WERE TO BE BENCHMARKED BY COMPARING THE PRICES THAT HAVE BEEN CHARGED BY THE ASSESSEE FROM THIRD PARTIES. ACCORDINGLY, ANALYSIS WAS DONE WHEREBY PRICES OF GOODS AS WERE SOLD TO ASSOCIATED ENTERPRISES AND AS SOLD TO NON-ASSOCIATED ENTERPRISES, COMMON GOODS WERE COMPARED. THE TRANSFER PRICING O FFICER ALSO NOTED THAT THERE WERE SEVERAL INSTANCES WHERE THE ASSESSEE HAD SOLD THE GOODS AT A LESSER PRICE TO THE ASSOCIATED ENTERPRISES THAN TO THE THIRD PARTIE S. AN INVOICE-WISE COMPARISON OF SUCH COMMON GOODS TRANSACTION WAS TABULATED AND WAS ANNEXED AS ANNEXURE 1 TO THE ORDER OF THE TRANSFER PRICING OFFICER. TH E TRANSFER PRICING OFFICER FURTHER SUMMARISED THE PRODUCT-WISE TRANSACTIONS AT PAGE 3 OF HIS ORDER. THE EXPLANATION OF THE ASSESSEE IN THIS REGARD WAS THAT THE SAME GO ODS COMMANDED LESSER PRICES IN ONE COUNTRY THAN THE OTHER COUNTRY. AS SUCH, CO UNTRY TO COUNTRY PRICES COMPARISON WAS NOT POSSIBLE. THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT WHEN THE PRICES WERE BEING COMPARED WERE FOB PRICES , THE DIFFERENCES SUCH AS GEOGRAPHICAL FACTORS, TRANSPORT COSTS, FORWARDING C HARGES, INSURANCE COSTS ETC. GET EVENED OUT. FURTHER, REJECTING THE CONTENTION OF T HE ASSESSEE, THE TRANSFER PRICING OFFICER HELD THAT THE ASSESSEE HAD SOLD GOODS TO IT S ASSOCIATED ENTERPRISES AT A LESSER PRICE THAN THE PRICES IT HAD CHARGED FROM TH E THIRD PARTIES. AS SUCH, THE ADJUSTMENT OF RS.2,13,58,654/- WAS MADE TO THE ARM S LENGTH PRICE OF THE TRANSACTIONS RELATING TO SALE OF GOODS TO ITS ASSOC IATED ENTERPRISES. THE ASSESSING OFFICER MADE THE AFORESAID ADJUSTMENT IN THE ORDER PASSED UNDER SECTION 143(3) OF THE ACT. ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 7 10. THE CIT(A) RELYING ON THE EARLIER ORDER IN ASSE SSMENT YEAR 2002-03 CONFIRMED THE ADJUSTMENT OF RS.2.13 CRORES. THE AS SESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 11. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE POINTED OUT THAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ITA NO.720/PUN/2 014 RELATING TO ASSESSMENT YEAR 2002-03 AND VIDE ORDER DATED 18-04-2016 THE TR IBUNAL HAD AFTER NOTING THE SUBMISSIONS OF THE ASSESSEE HELD THAT WHERE THE TRA NSFER PRICING OFFICER HAD ACCEPTED SUBSTANTIAL PART OF THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES THAT IS MORE THAN 80% UNDER TNM METHOD, THEN FOR THE MIN OR PART OF THE TRANSACTIONS, THE TRANSFER PRICING OFFICER HAD ERRED IN APPLYING THE CUP METHOD. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ISSUES RAISED IN THE PRESENT APPEAL WERE IDENTICAL TO THE ISSUE BEFO RE THE TRIBUNAL IN ASSESSMENT YEAR 2002-03. HE FURTHER REFERRED TO THE TABULATED CHART WHEREIN HE HAS POINTED OUT THAT THE RATES AT WHICH DIFFERENT ITEMS WERE EX PORTED TO THE ASSOCIATED ENTERPRISES IN DIFFERENT COUNTRIES DIFFER FROM THE RATES CHARGED FROM THE THIRD PARTIES. 12. HE ALSO POINTED OUT THAT THE FIRST POINT RAISED WAS THE GEOGRAPHICAL DIFFERENCES IN THE GOODS SOLD TO THE ASSOCIATED ENT ERPRISES AND THE NON- ASSOCIATED ENTERPRISES AND POINTED OUT THAT NONE OF THE COUNTRIES FOR DIFFERENT ITEMS SOLD AS COMMON PRODUCTS WERE THE SAME. HE FU RTHER POINTED THAT THERE WAS HUGE VOLUME DIFFERENCE IN THE PRODUCT SOLD TO ASSOC IATED ENTERPRISES AND THE NON- ASSOCIATED ENTERPRISES. NEXT DIFFERENCE WAS THE CR EDIT RISK DIFFERENCE WHEREIN IN RESPECT OF ASSOCIATED ENTERPRISES IT WAS NIL AND IN RESPECT OF NON-ASSOCIATED ENTERPRISES IT WAS PRESENT. NEXT DIFFERENCE WAS TH E CREDIT PERIOD DIFFERENCE WHEREIN AS AGAINST SALES TO ASSOCIATED ENTERPRISES, THE CREDIT PERIOD OF 30 DAYS WAS UNDERSTOOD BETWEEN THE PARTIES VIS-A-VIS TO NON -ASSOCIATED ENTERPRISES THE ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 8 CREDIT PERIOD WAS BETWEEN 45 TO 90 DAYS. THE LD. A UTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO MARKETING EXPENSES AGAINST GOODS SOLD TO ASSOCIATED ENTERPRISES AS AGAINST SAL ES TO NON-ASSOCIATED ENTERPRISES. HE STRESSED THAT UNDER RULE 10D(2) TH E CUP METHOD CANNOT MAKE RELIABLE AND ACCURATE ADJUSTMENT AND HENCE TO BE RE JECTED. HE ALSO EXPLAINED THAT AS AGAINST TOTAL EXPORTS OF RS.10.94 CRORES THE EXP ORT OF COMMON PRODUCTS WAS TO THE EXTENT OF RS.3.07 CRORES. 13. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BE LOW. 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL OF THE ASSESSEE IS AGAINST THE TRANSFER PRICING ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IN RESPECT OF EXPORT OF COMMON PRODUCTS BOTH TO THE ASSOCIATED ENTERPRISES AND NON -ASSOCIATED ENTERPRISES. THE TOTAL VALUE OF THE TRANSACTION IS ABOUT RS.3.07 CRO RES. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE AND TRADING OF ANIMAL HEALTHCARE AND VETERINARY PRODUCTS. THE MANUFACTURING UNITS OF THE ASSESSEE WERE LOCATED AT HYDERABAD AND PUNE. THE ASSESSEE IN ADDITION TO IMPORT OF MATERIAL FROM THE ASSOCIATED ENTERPRISES WAS ALSO EXPORTING THE RAW MATERIAL/TRADED GOODS TO GRO UP ENTITIES IN FRANCE, AUSTRIA, GERMANY AND BANGKOK. THE ASSESSEE HAD BENCHMARKED THE TOTAL TRANSACTIONS UNDERTAKEN BY IT, I.E. IMPORT OF RAW MATERIAL/FINIS HED GOODS FROM THE ASSOCIATED ENTERPRISES AND ALSO EXPORT OF RAW MATERIAL/CONSUME RS AND/OR FINISHED/TRADED GOODS AND THE VARIOUS EXPENSES PAID TO THE ASSOCIAT ED ENTERPRISES. THE ASSESSEE HAD AGGREGATED THE TRANSACTIONS AND APPLIE D TNM METHOD TO BENCHMARK THE ARMS LENGTH PRICE OF ITS INTERNATION AL TRANSACTIONS. THE TOTAL TURNOVER OF THE ASSESSEE WAS ABOUT RS.87.10 CRORES IN WHICH THE EXPORT OF FINISHED/TRADED GOODS TO ASSOCIATED ENTERPRISES WAS RS.10.06 CRORES. THE TRANSFER PRICING OFFICER HAS ACCEPTED BENCHMARKING DONE BY THE ASSESSEE IN ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 9 RESPECT OF ITS VARIOUS INTERNATIONAL TRANSACTIONS E XCEPT EXPORT OF COMMON PRODUCTS TO ASSOCIATED ENTERPRISES AND NON-ASSOCIATED ENTERP RISES AT RS.3.07 CRORES. THE TRANSFER PRICING OFFICER HAD SEPARATED THE SAID TRA NSACTIONS FROM COMMON POOL OF INTERNATIONAL TRANSACTIONS AND HELD THAT FOR BENCHM ARKING THE SAID TRANSACTIONS CUP METHOD WAS THE MOST APPROPRIATE METHOD. THE TR ANSFER PRICING OFFICER REJECTED THE PLEA OF THE ASSESSEE THAT THE SAID GOO DS TO THE ASSOCIATED ENTERPRISES AND NON-ASSOCIATED ENTERPRISES WERE EXP ORTED IN DIFFERENT COUNTRIES AND THE COUNTRY TO COUNTRY PRICES COMPARISON WAS NO T POSSIBLE. IN THIS REGARD, THE FIRST OBJECTION WAS THE GEOGRAPHICAL DIFFERENCE BEC AUSE OF WHICH THE CUP METHOD COULD NOT BE APPLIED TO BENCHMARK THE SAID INTERNAT IONAL TRANSACTIONS. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FURN ISHED ON RECORD A COMPARISON BETWEEN THE RATES CHARGED ON EXPORTS TO ASSOCIATED ENTERPRISES AND THE RATES CHARGED BY THE ASSESSEE ON EXPORTS TO THIRD PARTIES . THE PERUSAL OF THE DETAILS REFLECT THAT THE EXPORTS HAVE BEEN MADE BY THE ASSE SSEE TO ITS ASSOCIATED ENTERPRISES IN COUNTRY WHICH IS AT VARIANCE TO THE EXPORTS MADE TO THIRD PARTIES IN OTHER COUNTRIES. THE ASSESSEE HAS ALSO POINTED OUT VARIOUS OTHER DIFFERENCES, I.E. ON ACCOUNT OF VOLUME, THE CREDIT RISK TO BE UNDERTA KEN, THE PERIOD BEING DIFFERENT AND THE MARKETING EXPENSES IF ANY TO BE INCURRED. 15. WE FIND THE CIT(A) HAD REPRODUCED THE SUBMISSIO NS OF THE ASSESSEE IN THIS REGARD AT PAGES 24 TO 27 OF THE APPELLATE ORDER WHE REIN THE ASSESSEE HAD COMPARED THE PRICES OF GOODS SOLD TO ASSOCIATED ENT ERPRISES AND TO NON- ASSOCIATED ENTERPRISES AND THERE IS DIFFERENCE IN T HE RATES CHARGED. THE SAID DIFFERENCE IS CLAIMED TO BE MAJOR ON ACCOUNT OF GEO GRAPHICAL AND OTHER FACTORS. 16. WE FIND THAT THE TRIBUNAL IN ASSESSEES OWN CAS E IN ASSESSMENT YEAR 2002- 03 (SUPRA) HAD AFTER CONSIDERING THE SUBMISSIONS WH ICH ARE REPRODUCED AT PAGES 4 TO 9 OF THE ORDER OF THE TRIBUNAL HAD HELD AS UNDER : ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 10 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRE SENTATIVES OF RIVAL SIDES AND HAVE EXAMINED THE ORDERS OF THE AUTHORITIES BEL OW. WE HAVE ALSO CONSIDERED THE DECISION ON WHICH THE LD. AR OF THE ASSESSEE HA S PLACED RELIANCE. THE FIRST OBJECTION RAISED BY THE ASSESSEE AGAINST THE FINDIN GS OF THE COMMISSIONER OF INCOME TAX (APPEALS) IS AGAINST THE SELECTION OF CO MPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPRIATE METHOD FOR DET ERMINING THE ARMS LENGTH PRICE OF EXPORT OF FLOXIDIN 10% (50ML), DISREGARDIN G TNMM APPLIED BY THE ASSESSEE FOR BENCHMARKING THE ALP. A PERUSAL OF TH E RECORDS SHOW THAT DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER AP PEAL THE ASSESSEE HAS MANUFACTURED AND EXPORTED 5 PRODUCTS TO ITS AES AND THIRD PARTIES IN VARIOUS COUNTRIES. THE DETAILS OF THE PRODUCTS MANUFACTURE D BY THE ASSESSEE AND THE COUNTRY OF EXPORT ALONG WITH THE PRICES CHARGED PER UNIT ARE AS UNDER: NAME OF PRODUCT EXPORT TO AES EXPORT TO THIRD PARTIES COUNTRY PRICE COUNTRY PRICE DECIVAC OIL ADJ 100ML TURKEY 15.00 ITALY 11.75 AMNOVIT 250 GM INDONESIA 1.62 BANGLADESH 1.47 AND 1.62 HOG CHOLERA 50D NEITHELANDS 5.00 BELARUS 5.00 BERENIL 7% 20ML MALAYSIA 1.25 SRI LANKA 0.93 FLOXIDIN 10% (50ML) THAILAND 1.24 VIETNAM 3.81 7. THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIAT E METHOD FOR DETERMINING ALP. THE TPO ACCEPTED THE TNM METHOD A DOPTED BY THE ASSESSEE IN RESPECT OF 4 PRODUCTS EXCEPT FLOXIDIN 10% (50ML) . THE TPO APPLIED CUP METHOD AS THE MOST APPROPRIATE METHOD IN RESPECT OF FLOXIDIN 10% (50ML) ON THE GROUND THAT THE PRICE CHARGED BY THE ASSESSEE FROM ITS AES IS FAR LESS THAN THE PRICE CHARGED FROM THE THIRD PARTIES. THE ASSESSEE HAS GIVEN THE REASONS FOR THE DIFFERENCE BETWEEN THE TWO PRICES VIZ: VOLUME FACTO R, CREDIT PERIOD, CREDIT RISK, ANNUAL AND FUTURE BUSINESS AND GEOGRAPHICAL DISPARI TY. NOT CONVINCED WITH THE REASONS GIVEN BY THE ASSESSEE, THE TPO APPLIED CUP METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP IN RESPECT O F FLOXIDIN 10% (50ML). HOWEVER, THE TPO ALLOWED MINOR ADJUSTMENT IN RESPEC T OF VOLUME FACTOR 10%, CREDIT PERIOD .5% AND CREDIT RISK 5%. IN FIRST APP EAL, THE COMMISSIONER OF INCOME TAX (APPEALS) MARGINALLY INCREASED THE ALLOWANCE IN RESPECT OF VOLUME 20% AND CREDIT PERIOD 0.6%. THE COMMISSIONER OF INCOME TAX (APPEALS) ON THE DIRECTIONS OF THE CO-ORDINATE BENCH OF THE TRIBUNAL CONSIDERED THE GEOGRAPHICAL FACTOR AND REJECTED THE CONTENTIONS OF THE ASSESSEE TO GRANT A DJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCE. 8. THE DETAILS OF THE TRANSACTION IN RESPECT OF FLO XIDIN 10% (50ML) WITH AE AND THIRD PARTY ENTERED INTO BY THE ASSESSEE ARE AS UND ER: FLOXIDIN 10% 50ML ASSOCIATE ENTERPRISES THIRD PART Y PARTY NAME INTERVET (THAILAND) LTD. MODERN VETERI NARY TRADING COUNTRY THAILAND VIETNAM QUANTITY 30,144 3,152 CURRENCY EURO/USD EURO/USD ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 11 AMOUNT IN FOREIGN CURRENCY 37,240 12,020 AMOUNT IN INR 1,662,825 541,707 AVG. S.P./UNIT IN F.C. 1.24 3.81 G.M. % 70% 90% A PERUSAL OF THE ABOVE TABLE SHOWS THAT THE VOLUME OF SALE TO AE IS ALMOST TEN TIMES TO THAT OF THE THIRD PARTY. IT IS ALSO AN UN DISPUTED FACT THAT CREDIT RISK TO THIRD PARTY IS ALWAYS HIGHER THAN THE AE. AS FAR AS GEOG RAPHICAL DISPARITY IS CONCERNED, IT IS A FACT THAT BOTH THE COUNTRIES I.E. THAILAND AND VIETNAM ARE MEMBERS OF THE ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) BUT THAT DOES NOT MEAN THAT THE MARKET CONDITIONS OF BOTH THE COUNTRIES ARE SIMILAR . THAILAND IS ONE OF THE MOST COMPETITIVE MARKET IN SOUTH-EAST ASIA AND HAS AN ED GE OVER OTHER NEIGHBORING COUNTRIES IN RESPECT OF EASE OF DOING BUSINESS, LAB OUR COST AND OTHER INFRASTRUCTURE FACILITIES. 9. DE HORS, THE DIFFERENCES DISCUSSED ABOVE, A PERU SAL OF THE DOCUMENTS ON RECORD SHOW THAT MORE THAN 80% (83.55%) OF EXPORTS WHICH HAVE BEEN BENCHMARKED BY THE ASSESSEE UNDER TNMM HAS BEEN ACC EPTED BY THE AUTHORITIES BELOW. WHERE SUBSTANTIAL PART OF THE EXPORTS MADE TO AES HAVE BEEN ACCEPTED BY THE TPO AND THE REASON HAS BEEN GIVEN BY THE ASSESS EE FOR THE PRICE DIFFERENCE IN RESPECT OF ONE PRODUCT, WE FIND NO VALID REASON FOR ADOPTING CUP METHOD AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE TRANSA CTIONS. THE ASSESSEE HAS DISCHARGED ITS ONUS BY GIVING THE DETAILED REASONS FOR DIFFERENCE IN PRICE. THEREAFTER, THE ONUS IS ON THE TPO TO SHOW THAT THE METHOD ADOPTED BY THE ASSESSEE FOR BENCHMARKING THE TRANSACTIONS WITH AES IS NOT THE MOST APPROPRIATE METHOD. 17. THE TRIBUNAL PLACED RELIANCE ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF AMPHENOL INTERCONNECT INDIA PVT. LTD. VS. DCIT IN ITA NO.1548/PUN/2011 AND HELD THAT CUP METHOD COULD NOT BE APPLIED AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS PERTAINING TO EXPORT OF GOODS SPECIALLY WHERE THE TRANSFER PRICING OFFICER HAD ACCEPTED MORE THAN 90% OF THE EXPORT TO THE ASSOCIATED ENTERPRISES. THE TRIBUNAL IN THE CASE O F THE ASSESSEE NOTED THAT THE TRANSFER PRICING OFFICER HAD ACCEPTED MORE THAN 80% OF THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES AND IT WAS ONLY ON THE MINOR PART OF THE TRANSACTIONS THE TRANSFER PRICING OFFICER HAD APPLIED CUP METHOD EVE N THOUGH THE ASSESSEE EXPLAINED THE REASONS FOR DIFFERENCE IN THE RATE ON WHICH PRODUCTS WERE SUPPLIED TO THE ASSOCIATED ENTERPRISES IN ONE COUNTRY AND THE T HIRD PARTY IN THE OTHER COUNTRY. WE FIND THAT THE ISSUE RAISED BEFORE US IS IDENTICA L TO THE ISSUE RAISED BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2002-03 EXCEPT THAT IN THE ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 12 EARLIER YEAR THE EXPORT OF TRADED GOODS WAS IN RESP ECT OF ONE ITEM. HOWEVER, IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD EXPO RTED DIFFERENT ITEMS TO ITS ASSOCIATED ENTERPRISES AND ALSO TO THE THIRD PARTIE S. THE ASSESSEE HAS FILED THE COMPARATIVE DETAILS OF THE RATES CHARGES IN RESPECT OF EXPORTS TO ASSOCIATED ENTERPRISES AND TO THE THIRD PARTIES. THERE IS VAR IATION IN THE RATES SO CHARGED. THERE IS ALSO HUGE DIFFERENCE IN THE VOLUME OF GOOD S SOLD TO THE ASSOCIATED ENTERPRISES WHEN COMPARED TO THE EXPORT TO THIRD PA RTIES. THERE IS GEOGRAPHICAL DIFFERENCE, I.E. THE COUNTRIES TO WHICH EXPORTS ARE MADE TO THE ASSOCIATED ENTERPRISES AND THE EXPORT TO THE THIRD PARTIES. I N THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, AND APPLYING THE RATIO LAI D DOWN BY THE TRIBUNAL IN THE ASSESSMENT YEAR 2002-03 WE HOLD THAT NO ADJUSTMENT IS TO BE MADE BY APPLYING THE CUP METHOD TO PART OF THE INTERNATIONAL TRANSAC TIONS OF EXPORT TO ASSOCIATED ENTERPRISES IN RESPECT OF COMMON PRODUCTS. THE ASS ESSING OFFICER/TRANSFER PRICING OFFICER HAVING APPLIED TNM METHOD IN RESPEC T OF MAJORITY OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE IN THE YEAR UNDER CONSIDERATION ON AGGREGATE BASIS IS DIRECTED TO INC LUDE THE SAID TRANSACTIONS OF EXPORT OF COMMON PRODUCTS ALSO ALONG WITH THE OTHER TRANSACTIONS. THUS, THE ADJUSTMENT MADE BY THE ASSESSING OFFICER/TRANSFER P RICING OFFICER CONFIRMED BY THE CIT(A) ON ACCOUNT OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE ON EXPORT TO ASSOCIATED ENTERPRISES OF COMMON PRODUCTS IS THUS DELETED. GROUNDS OF APPEAL NO.2 A ND 3 RAISED BY THE ASSESSEE ARE THUS ALLOWED. 18. GROUNDS OF APPEAL NO.4 AND 5 RAISED BY THE ASSE SSEE ON WITHOUT PREJUDICE BASIS AGAINST THE GROUNDS ON MERITS ARE THEREFORE D ISMISSED. 19. NOW COMING TO THE APPEAL FILED BY THE REVENUE T HE FIRST ISSUE RAISED BY THE REVENUE VIDE GROUNDS OF APPEAL NO.1 AND 2 IS AGAINS T THE ORDER OF CIT(A) IN DELETING THE ADDITION OF RS.68,09,485/- ON ACCOUNT OF CURRENCY EXCHANGE LOSS. ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 13 20. BRIEFLY, THE FACTS RELATING TO THE ISSUE ARE TH AT THE ASSESSEE HAD ARRANGED FOREIGN CURRENCY LOAN OF USD OF $30,00,000 FROM ITS PARENT COMPANY M/S. INTERVET HOLDINGS B.V., NETHERLANDS. THE PERIOD OF THE LOAN WAS 10 YEARS. THE ASSESSING OFFICER NOTED THAT DURING THE YEAR UNDER CONSIDERAT ION THE ASSESSEE HAD ENTERED INTO THE CURRENCY SWAP AGREEMENT WITH CITI BANK, NA TO COVER ITS FOREIGN CURRENCY AND INTEREST RISKS WITH REGARD TO THE LOAN TAKEN. THE ASSESSING OFFICER FURTHER OBSERVED THAT AS PER THE AGREEMENT THE ASSESSEE HAD AGREED TO REPAY ITS FUTURE OBLIGATION INCLUDING INTEREST IN FIXED RATE INDIAN RUPEE AND RESTATED ITS LIABILITY AT THE FIXED RATE OF US$1 = RS.48.40. ON ACCOUNT OF RESTA TING OF THE LIABILITY AT THE FIXED RATE OF US$1=RS.48.40, THE ASSESSEE DEBITED A LOSS OF RS.81,71,381/- TO THE P&L ACCOUNT. THE ASSESSING OFFICER NOTED FROM THE COPY OF LETTER DATED 27-09-2002 ISSUED BY CITI BANK THAT THE PERIOD OF LOAN WAS DUE TO RETIRE ON 30-04-2008. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE LOSS INC URRED BY THE ASSESSEE ON RESTATING THE LIABILITY ON FIXED RATE ON CONVERSION OF US$ WAS TO BE SPREAD OVER THE PERIOD OF LOAN UPTO 30-04-2008. THE ENTIRE LOSS OF RS.81,71,381/- WAS THEREFORE HELD TO BE NOT DEDUCTIBLE FOR THE YEAR UNDER CONSID ERATION. THE ASSESSING OFFICER FURTHER HELD THAT THE SAID LOSS IS TO BE SPREAD OVE R A PERIOD OF SIX YEARS. ACCORDINGLY, SUM OF RS.13,61,896/- WAS ALLOWED TO T HE ASSESSEE AND THE BALANCE SUM OF RS.68,09,485/- WAS ADDED TO THE TOTAL INCOME . 21. THE CIT(A) POINTED OUT THAT THE FACTS NOTED BY THE ASSESSING OFFICER WERE NOT CORRECT WHEREIN THE LOSS WHICH WAS RECOGNISED I N THE BOOKS OF ACCOUNT WAS ON ACCOUNT OF SETTLEMENT OF FORWARD CONTRACT WHEREIN T HE LOSS OF RS.75,60,000/- PERTAIN ONLY TO THE YEAR UNDER APPEAL AND WAS REVEN UE EXPENDITURE. IT WAS FURTHER POINTED OUT THAT THE ASSESSEE HAD ENTERED I NTO A SWAP AGREEMENT SUBSEQUENTLY WITH THE CITI BANK IN OCTOBER, 2002 TO HEDGE ITS FOREIGN EXCHANGE RISK AND AT THE CLOSE OF THE YEAR THE OUTSTANDING L IABILITY ON ACCOUNT OF ECB WAS RECOGNISED AND DUE TO REINSTATEMENT THERE WAS CURRE NCY EXCHANGE GAIN OF ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 14 RS.17,32,534/-. THE ASSESSEE THUS POINTED OUT THAT IT HAD NET FOREIGN EXCHANGE LOSS. THE CIT(A) RELYING ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD . (2009) 312 ITR 254 (SC) AND ONGC CORP. LTD. VS. CIT (2010) 322 ITR 180 (SC) HELD THAT THE CURRENCY EXCHANGE LOSS OF RS.68,09,485/- WAS AN ALLOWABLE E XPENDITURE UNDER SECTION 37(1) OF THE ACT. 22. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF C IT(A) IN DELETING THE AFORESAID ADDITION OF RS.68,09,485/-. 23. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE PLACED RELIANCE ON THE ORDER OF THE AO. 24. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE POINTED OUT THAT SINCE IT HAD TAKEN FOREIGN CURRENCY LOAN OF USD $30,00,00 0; TO HEDGE THE LOSS ON SAME HAD ENTERED INTO A FORWARD CONTRACT. HOWEVER, THE SAID FORWARD CONTRACT WAS CANCELLED DURING THE YEAR ITSELF, ON WHICH THE ASSE SSEE INCURRED LOSSES. THEREAFTER, THE ASSESSEE ENTERED INTO SWAP AGREEMEN T AND AT THE END OF THE YEAR WHILE REVALUATION OF SAME, THERE WAS GAIN. HOWEVER , THE ASSESSEE INCURRED NET LOSS ON ACCOUNT OF FORWARD CONTRACT. REFERRING TO THE ORDER OF THE AO, LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE LOSS CLAIMED BY THE ASSESSEE WAS DISALLOWED ON THE BASIS OF SWAP AGREEM ENT AND IT WAS HELD BY THE AO THAT IT WAS DEFERRED RISK FOR EIGHT YEARS. HE S TRESSED THAT THE LOSS WAS NOT IN RELATION TO THE SWAP AGREEMENT WHEREAS THE LOSS WAS ON ACCOUNT OF FORWARD CONTRACT CANCELLATION DURING THE YEAR. OUR ATTENTI ON WAS DRAWN TO THE CONFIRMATION FROM CITI BANK, COPY OF WHICH IS PLACED AT PAGE 378 OF THE PAPER BOOK WHEREIN IT HAS BEEN POINTED OUT THAT THE FOREIGN CURRENCY LOAN WAS TAKEN IN JANUARY 2002 AND WAS CLOSED IN DECEMBER 2002. FURTHER, RELIANCE WAS PLACED ON THE ORDER OF THE CIT(A) BY THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE. ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 15 25. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE GROUNDS OF APPEAL NO.1 AND 2 RA ISED BY THE REVENUE IS AGAINST THE DEDUCTIBILITY OF LOSS ON ACCOUNT OF FORWARD CON TRACT. THE COURTS HAVE HELD THAT ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE OUTSTANDING LIABILITY OF ANY FOREIGN CURRENCY, AT THE CLOSING RATE, IS TO BE REC OGNISED IN THE PROFIT AND LOSS ACCOUNT FOR THE REPORTING PERIOD. IN THE FACTS OF THE PRESENT CASE, IT HAS BEEN NOTED BY THE CIT(A) THAT THE ASSESSEE HAD MADE EXTE RNAL COMMERCIAL BORROWINGS (ECB) OF USD $30,00,000 FROM ITS HOLDING COMPANY TO MEET THE REQUIREMENT OF ITS WORKING CAPITAL. THE ASSESSEE HAD COVERED THE FORE IGN CURRENCY/FLUCTUATION RISK ON THE ECB LOAN THROUGH FORWARD CONTRACT ENTERED IN TO WITH CITI BANK ON A YEARLY BASIS. THE PERIOD OF THE CONTRACT WAS FROM 01-01-2 002 TO 31-12-2002 AND WITH VALUE DATA AS ON 31-12-2002. THE EXCHANGE RATE FIX ED IN THE SAID CONTRACT WAS RS.51.36 PER USD. THE FORWARD CONTRACT WAS SETTLED /CANCELLED BY THE ASSESSEE BEFORE THE SAID VALUE DATE AND THE ASSESSEE PAID TO CITI BANK, THE DIFFERENCE BETWEEN THE FORWARD CONTRACT RATE, IT WAS RS.51.36 PER USD AND THE SPOT RATE ON THE DATE OF CANCELLATION, WHICH WAS RS.48.84 PER US D. THE ASSESSEE INCURRED NET LOSS ON CANCELLATION OF FORWARD EXCHANGE CONTRACT A T RS.75,60,000/-. THE SAME WAS RECOGNISED AS FOREIGN EXCHANGE LOSS IN THE BOOK S OF ACCOUNT OF THE ASSESSEE. SUBSEQUENTLY, THE ASSESSEE ENTERED INTO A SWAP AGRE EMENT WITH CITI BANK IN OCTOBER 2002 TO HEDGE ITS FOREIGN EXCHANGE RICK AND THE FOREIGN CURRENCY LIABILITY WAS FIXED AT RS.48.40 PER USD WITH RESPECT TO ECB L OAN OF USD $30,00,000 TAKEN BY THE ASSESSEE FROM ITS HOLDING COMPANY. SUBSEQUE NTLY, FOR THE PURPOSE OF CLOSURE OF THE BOOKS OF ACCOUNT, THE OUTSTANDING ON ACCOUNT OF ECB WAS RECOGNISED AT THE AGREED RATE OF RS.48.40 PER USD I N THE BOOKS OF ACCOUNT OF THE ASSESSEE AT THE YEAR END. DUE TO THE REINSTATEMENT THERE WAS CURRENCY EXCHANGE GAIN OF RS.17,32,534/- AS THE LIABILITY HAD REDUCED AS COMPARED TO THE OPENING ECB BALANCE. THE ASSESSEE HAD FURNISHED THE WORKIN G OF THE CURRENCY EXCHANGE GAIN OF RS.17,32,534/- WHICH IS AS UNDER : ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 16 PARTICULARS AMOUNT (RS.) LOAN FROM HOLDING COMPANY AS ON 31.03.2002 14,69,32 ,534 LOAN FROM HOLDING COMPANY AS ON 31.03.2003 14,52,00 ,000 NET GAIN 17,32,534 THE ASSESSEE THUS CLAIMED THE AFORESAID NET LOSS OF RS.68,09,485/- AS AN ALLOWABLE EXPENDITURE UNDER SECTION 37(1) OF THE AC T WHERE THE EXPENDITURE HAD BEEN BOOKED IN THE BOOKS OF ACCOUNT ON ACCOUNT OF B USINESS CONSIDERATION, THEN THE SAME IS TO BE ALLOWED AS REVENUE EXPENDITURE. THE SAID LOSS ON ACCOUNT OF FORWARD CONTRACT IS ALLOWABLE AS BUSINESS EXPENDITU RE IN THE HANDS OF THE ASSESSEE. CONSEQUENTLY, WE HOLD SO. GROUNDS OF AP PEAL NO. 1 AND 2 RAISED BY THE REVENUE ARE THUS DISMISSED. 26. THE ISSUE IN GROUNDS OF APPEAL NO.3 AND 4 RAISE D BY THE REVENUE IS AGAINST THE ALLOWANCE OF EXPENDITURE OF RS.5 LAKHS INCURRED BY THE ASSESSEE ON TERMINATION OF SERVICES OF AN EMPLOYEE. 27. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE POINTED OUT THAT FULL AND FINAL SETTLEMENT DUES, IF ANY, OF THE RETIRING EMPLOYEE LEAVING THE SERVICES OF THE ASSESSEE WERE SETTLED AT RS.5 LAKHS AS PER THE DETAILS AT PAGE 402 OF THE PAPER BOOK. THE ASSESSEE HAD NO VOLUNTARY RETIREME NT SCHEME IN OPERATION DURING THIS YEAR AND THE AMOUNT WAS PAID TO THE EMP LOYEE AND BOOKED AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER HELD T HE SAID EXPENDITURE TO BE CAPITAL EXPENDITURE IN THE HANDS OF THE ASSESSEE. 28. THE CIT(A) RELYING ON THE RATIO LAID DOWN BY TH E HONBLE KERALA HIGH COURT IN THE CASE OF TRAVANCORE TEA ESTATES LTD. VS. CIT (1985) 154 ITR 745 (KER.) ALLOWED THE CLAIM OF THE ASSESSEE. ITA NO.721/PUN/2014 ITA NO.800/PUN/2014 INTERVET INDIA PRIVATE LIMITED 17 29. WE FIND NO MERIT IN THE GROUNDS OF APPEAL NO.3 AND 4 RAISED BY THE REVENUE. THE ISSUE RAISED IN THE GROUNDS OF APPEAL IS AGAINST THE COMPENSATION ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE A CT. THE ASSESSEE HAD MADE THE AFORESAID COMPENSATION ON TERMINATION OF SERVIC ES OF THE SAID EMPLOYEE. THE FULL AND FINAL SETTLEMENT OF COMPENSATION WAS PAID BY THE ASSESSEE IN ORDER TO PRESERVE ITS BUSINESS SO AS TO PREVENT THE TERMINAT ED EMPLOYEE FROM CAUSING ANY DAMAGE TO THE ASSESSEE. THE ISSUE STANDS COVERED B Y THE RATIO LAID DOWN BY THE HONBLE KERALA HIGH COURT IN THE CASE OF TRAVANCORE TEA ESTATES LTD. VS. CIT (SUPRA). ACCORDINGLY, UPHOLDING THE ORDER OF CIT(A ) WE DISMISS THE GROUNDS OF APPEAL NO.3 AND 4 RAISED BY THE REVENUE. 30. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY AL LOWED AND THE APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 21 ST DAY OF DECEMBER, 2017. SD/- SD/- ( ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE DATED : 21 ST DECEMBER, 2017 . SATISH / COPY OF THE ORDER IS FORWARDED TO : THE APPELLANT ; THE RESPONDENT; THE CIT(A) - IT/TP, PUNE THE CIT(A) - I , PUNE ; THE DR B , ITAT, PUNE; GUARD FILE . / BY ORDER // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE