Soma Textiles & Industries Ltd., Ahmedabad V. The DCIT, Circle-4(1)(1), Ahmedabad

ITA 81/AHD/2021

AI Insights

The case involves multiple appeals by Soma Textiles & Industries Ltd. and the Department of Income Tax concerning the assessment years 2009-10, 2010-11, 2011-12, and 2013-14. The primary issues revolved around the computation of arms length price for loan interest, the referral of cases to the transfer pricing officer, and the treatment of certain financial transactions and expenses under the Income Tax Act. The ITAT's decisions were influenced by precedents set in earlier years, particularly the assessment year 2008-09, where similar issues had been adjudicated.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131505 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 18-01-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 02-05-2021
• Other Referred Cases: Goetze India Ltd. vs. CIT, Harrisons Malayalam Ltd. vs. CIT, Checkmate Services (P.) Ltd. vs. CIT, Gujarat State Road Transportation Corporation vs. CIT, Pr. CIT vs. Suzlon Energy Ltd., PCIT vs. Vedanta Ltd., Global Wool Alliance (P.) Ltd. vs. CIT, Quality Engineering & Software Technologies (P.) Ltd. vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; Speculative transactions; TDS; Set aside
• Section: 43B; 143(3); 40(a)(ia); 37(1); 43(5); 205; 144C; 92CA

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Shri Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Sl. No. Appeal ITA A.Y. Appellant Respondent 1. 3491/Ahd/2016 2009-10 DCIT, Circle-4(1)(1), A’bad Soma Textiles & Industries Ltd. 2. 17/Ahd/2017 2009-10 Soma Textiles & Industries Ltd. Addl. CIT, Range-8, A’bad 3. 366/Ahd/2017 2010-11 Soma Textiles & Industries Ltd. Addl. CIT, Range-8, A’bad 4. 81/Ahd/2021 2011-12 Soma Textiles & Industries Ltd. DCIT, Circle- 4(1)(1), A’bad 5 82/Ahd/2021 2013-14 Soma Textiles & Industries Ltd. DCIT, Circle- 4(1)(1), A’bad PAN: AADCS0 405 R Asses see b y : Shri Su res h Ga ndhi, A.R. Revenue by : Shri S udhendu Das, CIT-D R & Shri Atul Pandey, S r. D. R. Date of hearing : 19-01 -2 023 Date of pronouncement : 15-02 -2 023 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- These are five appeals filed by the Assessee and by Department against the order ld. of CIT(A) for assessment year 2009-10 (by the Assessee and the Department) and for assessment years 2010-11, 2011-12 and 2013- 14 (by the Assessee). I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 2 2. Since common issues are involved for all the years under consideration, all the appeals are being disposed of by way of a common order. 3. We shall first take up the appeals filed by the assessee and the Department for assessment year 2009-10 and observations wherever applicable shall apply to assessment years 2010-11, 2011-12 and 2013-14 as well. We shall first take up the Assessee’s appeals for assessment year 2009- 10. ITA Number 17/Ahd/2017 for assessment year 2009-10 (Assessee’s Appeal) Ground No. 1: CIT(A) erred on facts in dismissing the appellant’s ground challenging action of the Assessing Officer in referring the case to transfer pricing officer for computation of arms length price in relation to alleged international transactions Soma Textile FZE 100% subsidiary of the assessee company. Ground No. 2: Ld. CIT(A) erred in confirming the addition of Rs. 4,87,46,666/- made by the Assessing Officer on account arms length price of loan interest 4. The brief facts relating to Grounds of appeal Number 1 and 2 of the assessee’s appeal are that the assessee had advanced a certain sum of money to its subsidiary company Roma Textile FZE. The assessee company was of I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 3 the view that such advance was in the nature of quasi capital and further the entire proceeds of the GDR issue have been invested in the aforesaid subsidiary and accordingly no addition was warranted u/s. 92CA(3). However, the Assessing Officer made adjustment u/s. 92CA of the Act, which were also confirmed by the CIT(A) by observing that ld. CIT(A) on similar facts for assessment year 2008-09 and also the ITAT Ahmedabad in assessee’s own in ITA No. 262/Ahd/2012 dated 07-07-2015 for assessment year 2007-08 had decided this issue against the assessee and accordingly, ld. CIT(A) held that addition of Rs. 7,87,46,666/- on account of upward adjustment on ALP was justified. 5. Before us, the counsel for the assessee agreed that the issue relating to ground nos. 1 & 2 has been decided against the assessee by Hon’ble ITAT for assessment year 2008-09 in ITA No. 472/Ahd/2014 and accordingly, the assessee shall not be pressing ground no. 1 and 2. It would be useful to reproduce the relevant extract of the ITAT decision for reference:- “4. Learned representatives fairly accept that there is no material variation in the facts and circumstances of the case, except that, in this assessment year and as against LIBOR plus 2% adopted by the TPO himself as arm's length interest, the TPO has recommended 8.6% as arm's length interest. 5. The justification for this variation is given as an additional 2% is higher risk in lending to the subsidiary, and is justified as to guarantee which the subsidiary would have required from the assessee. The TPO has observed that even if the subsidiary was to obtain this loan from the bank, in addition to LIBOR plus 2%, the assessee would have needed a guarantee from its parent company, as the subsidiary does not have credit rating, and the effective borrowing rate would thus have been LIBOR+ 2% for bank's margin+ 2% for the guarantee fees. Aggrieved, assessee carried grievance, inter alia, against this effective margin of LIBOR plus 4% to the CIT(A), but without any success. The CIT(A) confirmed the same on the ground that the ALP of corporate guarantee @ 2% is fair and reasonable. The assessee is aggrieved and is in appeal before us. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 4 6. So far as the issue of ALP adjustment being required, in principle, is concerned, learned counsel for the assessee has fairly conceded that this issue must be decided against the assessee at this forum, and that he will carry the matter, if so advised, in further appeal before Hon'ble Courts above. Ground no. 1 and 2, therefore, have to be decided against the assessee and the impugned action of the authorities below, in principle, is to be confirmed.” 6. In view of the above since ITAT has decided the issue against the assessee on identical facts in assessee’s own case for assessment year 2008- 09, the ground nos. 1 & 2 of the assessee’s appeal are dismissed accordingly. Ground No. 3: Ld. CIT(A) has erred in confirming the above addition made by the Assessing Officer by charging interest @ 7.14%. 7. With respect to this ground of appeal, the counsel for the assessee submitted that on identical facts, the issue has been decided in favour of the assessee by Hon’ble ITAT for assessment year 2008-09 in ITA No. 472/Ahd/2014 wherein ITAT held that Libor +2% arms length interest as an arm’s length price. The counsel for the assessee submitted that the Department has not been able to bring forth any change in facts and circumstances as compared to that of assessment year 2008-09. In response, the ld. Departmental Representative placed reliance on the orders made by the Assessing Officer and ld. CIT(A). 8. We observe that the ITAT in the assessee’s own case for assessment year 2008-09 has decided the issue by holding that the ALP adjustment is required to be made on the basis of Libor + 2%. The relevant extracts of the ruling are reproduced below for reference:- I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 5 “8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment dated 25th February 2015 a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows: 8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Sen Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assesses. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted. 10. The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis. 11. This Court is of the opinion that the reasoning of the IT AT on each of the heads which went into the adjustment of ?10.11786/- is reasonable and justified and does not call for any interference. (Emphasis, by underlining, supplied by us) 9. That was also a case in which the lender parent company was taken as the tested party, the loan was advanced to a subsidiary company without much to the credit of its financial credentials and the loan was treated as a high risk loan resulting in adopting the maximum LIBOR rate on which dollar loans were advanced. Yet, Hon’ble High Court specifically approved the Tribunals reasoning that the "assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis". When such are the views of Their Lordships, it is futile to suggest that the loans advanced by the parents to subsidiary can indeed be taken as BB to D grade investments which refers to, as noted by the TPO himself at page 28 of the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 6 8. In this view of the matter, not only the fiction of assuming a corporate guarantee and then proceeding to benchmark the same, is unsustainable in law, even otherwise an adjustment due to assumption about lower credit rating of the subsidiary is not warranted. Perhaps the situation could have been materially different if the credit rating of the subsidiary was demonstrated to be lower but that is not the case before us. IN any case, in the immediately preceding assessment year, the TPO himself has adopted LIBOR plus 2% as an arm's length interest and there is no material change in the facts and circumstances of the case in this year. In view of these discussions, and bearing in mind entirely of the case, we uphold the grievance of the assessee to the limited extent that the ALP adjustment is required to be made on the basis of LIBOR plus 2%. Ground no. 3, therefore, is to be allowed.” 9. In view of the above observations, since no change in the facts and circumstances has been brought to our notice by ld. Departmental Representative from A.Y. 2008-09, we are hereby allowing ground no. 3 of the assessee’s appeal. Ground No. 4: Ld. CIT(A) has erred in confirming addition of Rs. 15,02,592/- made by the Assessing Officer on account of disallowance 1/5th of GDR issue expenses claimed by the company as allowable deduction u/s. 35D of the Act. 10. At the outset, the counsel for the assessee submitted that the issue has been decided against the assessee by Hon’ble ITAT for assessment year 2008-09 in ITA 472/Ahd/2014 and accordingly he shall not be pressing for ground no. 4 of his appeal. 11. It would be useful to reproduce the relevant extracts of the ITAT ruling for assessment year 2008-09 for reference. “10. In ground no. 4 and 7, which we will take up together, the grievances raised by the assessee is as follows: I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 7 The learned CIT(A) has erred in law and on facts in confirming the addition of Rs.15,02,592/- made by the AO on account of disallowance of 1/5 th of GDR Issue expenses claimed by the company as allowable deduction u/s.35D of the Act on the ground that the expenses incurred for issue of share capital is capital loss to the company. In view of facts and submissions filed as well as legal position, the impugned addition of Rs.15,02,592/- requires to be deleted. The learned CIT(A) has erred in law and on facts in confirming the action of the Assessing Officer in holding that the loss due to foreign exchange fluctuation amounting to Rs.5,46,50,757/- being relatable to GDR issue is a permanent capital loss of the company and hence benefit of capitalization of the said loss in future will not be available to the company. In view of facts and submissions filed as well as legal position, the observation and findings of the AO though not having any revenue effect during the year under consideration requires to be quashed/vacated and the said loss of Rs.5,46,50,757/- being on revenue account requires to be allowed as a deduction and the total income be revised accordingly. 11. Learned representatives fairly agree that this issue is also covered, against the assessee, by a decision of the coordinate bench in assessee's own case for the assessment year 2007-08 (supra), wherein the coordinate bench has inter alia observed as follows: 15. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has incurred expenses of Rs 75,12,960 on GDR issue and the treated the same as preliminary expenses eligible for amortization under section 35D of the Act However, the Assessing Officer declined the deduction of Rs 15,02,592, claimed by the assessee under section 35D, by observing that "it is settled law that whatever expense is incurred for issue of share capital is capital loss to the company and is neither revenue expenditure nor a capital expenditure for the purposes of business". Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. While rejecting the contention of the assessee, learned CIT(A) observed that, "the facts of the case are a/so squarely covered by the Supreme Court decision in the case of Brooks bond India Ltd Vs CIT (225 ITR 798)", that "these expenses are not in nature of preliminary expenses and are, therefore, not allowable as per the provisions of Section 35D", and that "the appellant has given a loan out of this amount to its subsidiary in UAE and, therefore, it has not been used for any of the purposes under section 35D of the Act". The assessee is aggrieved and is in further appeal before us. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 8 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 17. We find that, as held by Hon'ble Supreme Court in the case of Brooke Bond Limited ' (supra), the expenses on issuance of share capital are capital expenses in nature and that these expenses cannot be a/lowed as a deduction as revenue expenses. However, as long as these expenses, even if capital in nature, satisfy the conditions set out in Section 35D, these expenses are eligible for amortization under Section 35D. One of the conditions in Section 35D(1), as it stood at the material point of time, is that either the eligible expenses should be incurred before the commencement of the business, and, in a situation in which the expenses are incurred after the commencement of business, the expenses should be incurred for extension of his undertaking or setting up of a new industrial undertaking. This condition is clearly not satisfied on the facts of the present case as the expenses are incurred after the commencement of the business and it is not even assessee's case that the expenses are incurred for extension of his undertaking or for setting up of new industrial undertaking. As for the decision of a coordinate bench, in the case of Mahindra & Mahindra Ltd Vs JVIT [(2010) 36 SOT 348 (Bom)], this decision was in the context of foreign currency convertible bonds which were debt instruments, though convertible into equity at a later stage. That decision has no bearing on the facts of this case. In view of these discussions, we see no merits in this grievance of the assessee either. The stand of the authorities below does not call for any interference. 12. As learned counsel for the assessee has fairly conceded that these issues must be decided against the assessee at this forum, and that he will carry the matter, if so advised, in further appeal before Hon'ble Courts above, and respectfully following the views of the coordinate bench in assessee's own case, we confirm the stand of the authorities below on this point and decline to interfere in the matter.” 12. In view of the observations made by the ITAT, ground no. 4 of assessee’s appeal is hereby dismissed. Ground No. 5: CIT(A) erred in confirming addition of Rs. 11,76,704/- on account disallowance of modified value added tax (MVAT). I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 9 13. The brief facts in relation to this ground of appeal are that when the assessee made purchases an amount of Rs. 11,27,327/- was separately shown as debit to the MVAT “receivable account” under the impression that the amount of MVAT will be available to the company for the purpose of set off against payment of VAT liability. Accordingly, the assessee submitted that to this extent Rs. 11,27,327/- purchases were shown less as only the net amount of purchases were shown as debit to purchases i.e. excluding VAT. Later on when it came to the knowledge of the assessee company that payment of MVAT will not be available to the company for the purpose of set off, the aforesaid debit to the MVAT receivable amount was reversed by crediting to the MVAT receivable account and such reversal has been considered as expenditure under the held “Miscellaneous Expenditure”. The contention of the assessee was that the amount of MVAT has been considered as part of the expenditure and the same is allowable because it is part of the purchase which is an allowable deduction. During the assessment proceedings, the Assessing Officer rejected the assessee’s claim on the ground that the assessee has failed to establish that there was no credit available in the MVAT receivable account other than the incorrect debit entry of Rs. 11,76,704/- for adjustment against purchases when MVAT receivable account was written off. Accordingly, the Assessing Officer held that the assessee has failed to justify with precise details as to how writing off of MVAT receivable amount does not impact the profit of the company. Accordingly, the above amount was disallowed by the Assessing Officer. In appeal, the ld. CIT(A) on consideration of the above facts dismissed the appeal of the assessee. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 10 14. Before us, the assessee reiterated the submission made before the lower Authorities. However, we are of the considered view that ld. CIT(A) has not erred in facts and in law in dismissing the assessee’s appeal. The assessee has not been able to give any evidence in support of his contention that he had incorrectly debited the aforesaid sum to the MVAT receivable account and the assessee has also not been able to establish that there is no credit available in the MVAT receivable account other than wrongly debited entry of Rs. 11,76,706/- for adjustment against purchase when the MVAT receivable account was written off. It is also not clear as to when the assessee came to realize that credit of MVAT was not available to him. 15. In view of the above observations, we find no infirmity in the order of Ld. CIT(A) and ground no. 5 of assessee’s appeal is dismissed. Ground number 6: addition on account of foreign exchange derivatives loss while treating it as speculative in nature 16. The brief facts in relation to this ground of appeal are that the assessee had entered into an agreement with ICICI bank for auction transaction on 06-01-2005, which is the Master Agreement between the assessee and ICICI bank in order to safeguard fluctuation in dollar rates which the assessee company realizes on its exports. During the year under consideration, the assessee claimed the loss of 7,96,68,962/- on account of derivative transaction, by filing a revised computation, during the course of assessment proceedings (the assessee had omitted to make the aforesaid claim in the return of income). The AO did not allow the aforesaid loss by relying on the Supreme Court order in the case of Goetze India Ltd. [2006] 157 Taxman 1 I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 11 (SC) on the ground that the assessee is precluded from making a fresh claim during the course of assessment proceedings. In appeal, Ld. CIT(A) also dismissed the assessee’s appeal by relying on the decision passed by his predecessor CIT for assessment year 2008-09, in which on identical issue, the ground of the assessee was dismissed by Ld. CIT(A) vide order dated 26-11-2013. 17. Before us, the counsel for the assessee submitted that the issue has now been decided in favour of the assessee by ITAT in assessee’s own case for assessment year 2008-09 on identical set of facts, and accordingly the appeal is to be disposed of in light of the aforesaid order. We observe that the ITAT the assessee’s own case for assessment year 2008-09 has allowed the assessee’s appeal on this ground with the following observations: “15. During the course of scrutiny assessment proceedings, it was noticed that the assessee had claimed loss on derivative transactions during the year amounting to Rs 57,76,604. When the Assessing Officer probed the matter further, it was found that these transactions were stated to be hedge the foreign exchange obligations of the assessee in respect of export realizations.. As this forward contract was said to be in the course of assessee’s business, and in respect of his foreign exchange dealings, the loss was claimed as a business loss. The Assessing Officer, however, did not agree. He was of the considered view that since the contract was settled, otherwise than through delivery, section 43(5) was attracted, and, accordingly, loss was required to be treated as speculative loss. The Assessing Officer was also of the view that, in the light of CBDT instruction no. 3 of 2010 dated 23rd March 2010, such a loss in foreign exchange derivates cannot be allowed as deduction. It was in this background that the Assessing Officer disallowed deduction of Rs 57,76,604. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) was of the view that assessee has not been able to link he transactions in foreign exchange derivatives with the foreign exchange realizations, and as the transactions have been settled without delivery and are, as such, speculative transactions in nature. The assessee is aggrieved and is in further appeal before us. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 12 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 17. We have noticed that, as evident from a plain reading of the assessment order, the short case of the Assessing Officer is that since the transaction leading to the impugned loss is a speculative transaction, under section 43(5) of the Act, the loss incurred on the transaction is required to be treated as loss from speculative business which cannot be set off against income of the assesse under the head ‘profits and gains from business and profession’. However, in our considered view, this approach itself proceeds on the fallacy that every loss, in the course of or due to a speculative transaction, is to be treated as loss of the speculative business. Explanation 2 to Section 28 states, “Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business" shall be deemed to be distinct and separate from any other business”, which implies it is only when speculative transactions are of such a nature as to constitute business on standalone basis, the income and losses from such transactions is required to be treated as distinct and separate from any other normal business. In other words, even speculative transactions, as long as such transactions are incidental to the main business of the assessee, cannot result in the profits or losses from such transactions being treated separately as that of a speculation business and thus making them ineligible for being set off against normal business profits and losses. Nothing really, therefore, turns on a transaction being settled, otherwise than through delivery, as long as such a transaction has standalone character isolated from the main activities of business. For this short reason alone, the action of the Assessing Officer must be held to be unsustainable in law. In any event, the assessee has filed detailed contracts notes before us which link the transactions to forward contracts entered into by the assessee. As a matter of fact, each of the confirmation so filed from the ICICI Bank categorically states that “the notional principal amount of the transaction does not exceed the outstanding amount of underlying transactions which the counterparty ( i.e. the assessee), seeks to hedge against”. In this view of the matter, all the derivate transactions are specific hedging transactions against foreign exchange transactions of the assessee and are to be treated as integral part of the business transactions of the assessee. These transactions, by no stretch of logic, cannot be treated as standalone transactions, and as such loss on these transactions cannot be treated as loss from speculation business ineligible for set off against normal business profits. As for the CBDT instruction relied upon by the Assessing Officer, such instructions do not bind the appellate authorities, and nothing, therefore, turns on I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 13 the same- so far as our adjudication is concerned. The losses on account of foreign exchange contracts are bonafide expenses incurred in furtherance of legitimate business interests of the assessee and are to be allowed as deduction under section 37(1) as such. In view of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee. The Assessing Officer is, therefore, directed to delete the impugned disallowance of Rs 57,76,604. 17. Ground no. 5 is thus allowed.” 18. Respectfully following the decision of ITAT, we hereby allow ground number 6 of the assessee’s appeal. Ground number 7: Ld. CIT(A) erred in confirming addition on account of late remittance of employee’s contribution to PF and ESIC under section 36 (1) (va) of the Act. 19. In our view, the issue is squarely covered against the assessee by the order of Hon'ble Supreme Court in the case of Harrisons Malayalam Ltd. [2022] 145 taxmann.com 608 (SC), wherein the Supreme Court dismissed the SLP against order of High Court that where assessee-company failed to pay employees’ contribution towards EPF and ESI within due date prescribed in respective Acts, deduction under section 36(1)(va) was not allowable. Again in the case of Checkmate Services (P.) Ltd. [2022] 143 taxmann.com 178 (SC), the Supreme Court held that there is a marked difference between nature and character of assessee-employer's contribution and amounts retained by assessee from out of employee's income by way of deduction wherein one is liability to be paid by employer and second is deemed income as per section 2(24)(x) which is held in trust by assessee- employer, thus, said marked difference was to be borne while interpreting obligation of assessee-employer under section 43B. Therefore, the non I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 14 obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was not part assessee-employer's income, thus, said clause would not absolve assessee-employer from its liability to deposit employee's contribution on or before due date as a condition for deduction. Further, jurisdictional High Court decision in case of Gujarat State Road Transportation Corporation (2014) 41 taxman.com 100, wherein it was held that where assessee did not deposit employees' contribution to employees' account in relevant fund before due date prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B of the Act. Again the Gujarat High Court in the case of Pr. CIT v. Suzlon Energy Ltd. [2020] 115 taxmann.com 340 (Gujarat) held that where assessee had not deposited employees' contributions towards PF and ESI amounting Rs. 15.20 lakhs within prescribed period in law and Assessing Officer by invoking provisions of section 36(1)(va) read with section 2(24)(x) made addition of aforesaid amount to income of assessee, impugned addition made to income of assessee was justified. Respectfully following the above decisions of Jurisdictional High Gujarat High Court, we hold that there is no infirmity in the order passed by ld. CIT(A). We accordingly dismiss the appeal of the assessee. 20. In view of the above, ground number 7 of the assessee’s appeal is dismissed. 21. In the combined result, appeal of the assessee is partly allowed for assessment year 2009-10. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 15 We shall take up Department’s appeal for assessment year 2009-10 (ITA Number 3491/Ahd/2016): Ground Number 1: Ld. CIT(A) erred in deleting the disallowed loss of 3,90,79,771/- on account of foreign currency fluctuation on loan for working capital 22. The brief facts in relation to this ground of appeal are that Dena Bank, State Bank of India and IDBI Bank sanctioned loan to the assessee for the purpose of its working capital requirements in foreign currency. The assessee incurred loss of 3,90,79,771/- on account of rate difference since the company had paid lower interest on foreign exchange working capital loan as compared to loan taken in Indian currency and therefore the difference on account of foreign exchange fluctuation was an additional liability of the assessee which is in the nature of compensation for the lower interest rate charged. However, the assessee did not claim the aforesaid loss in the return of income and claimed it during the course of assessment proceedings. The AO however did not allow the assessee’s claim by placing reliance on the decision of Goetze India Ltd [2006] 157 Taxman 1 (SC) and held that the since the assessee did not make the aforesaid claim in the return of income, the assessee cannot be permitted to do the same during the course of assessment proceedings. 23. In appeal, Ld. CIT(A) allowed the assessee’s appeal holding that the loss was on account of borrowings for the revenue expenditure. The Ld. CIT(A) observed that from the documents it can be seen that these banks have sanctioned loan to the assessee for purpose of working capital I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 16 requirements in foreign currency. Accordingly, as the borrowings were on revenue account, the assessee would be eligible for claiming loss of 3,90,79,771/-. 24. Before us, Ld. Departmental Representative placed reliance on the observations made by the AO in the assessment order. We observe that even in the remand proceedings, when the Ld. CIT(A) referred the file back to the AO for his comments on this issue, the AO only relied upon the Supreme Court decision in the case of Goetze India Ltd supra and did not point out any factual or legal infirmity in the claim of loss by the assessee. Further, we find no infirmity in the order of Ld. CIT(A), who on appreciation of the facts of the case of the assessee allowed the assessee’s appeal on the ground that the loss on foreign currency loan is on revenue account. Notably, in the case of PCIT v. Vedanta Ltd. [2023] 146 taxmann.com 34 (SC), the Hon'ble Supreme Court SLP dismissed against order of High Court that losses incurred by assessee-company due to foreign exchange fluctuation on export proceeds was to be allowed as business expenditure under section 37(1) of the Act. In the case of Global Wool Alliance (P.) Ltd. [2022] 145 taxmann.com 466 (Kolkata - Trib.), the ITAT held that Exchange loss incurred by assessee upon restatement of loan in foreign currency which was attributable towards working capital was to be allowed. 25. In the result, in light of the above observations, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 26. In the result, ground number 1 of the Department’s appeal is dismissed. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 17 Ground number 2: Ld. CIT(A) erred in deleting disallowed loss of 1,32, 84,150/- on account of MTM loss in exports 27. The brief facts relating to this ground of appeal are that during the course of assessment proceedings, the assessee claimed Mark to Market (MTM) loss of 1,32,84,150/- relating to foreign currency forward contract on account of exchange rate difference for export paid/provided to Dena Bank, which is related to exports made by the assessee. The AO, however, did not allow the assessee’s claim by placing reliance on the decision of Goetze India Ltd supra and held that since the assessee assessee did not make the aforesaid claim in the return of income, the assessee cannot be permitted to do the same during the course of assessment proceedings. Further, he held that the aforesaid loss is a purely notional loss and hence not allowable to the assessee. 28. In appeal, Ld. CIT(A) allowed the assessee’s appeal on this ground by holding that this loss was incurred on account of foreign currency forward contract on account of exchange rate difference for exports paid/provided to Dena bank. Accordingly, since this loss was on revenue account, even if not claimed in the return of income, the same is allowable to the assessee. 29. The Department is in appeal before us against the order passed by Ld. CIT(A) allowing relief to the assessee in respect of this ground of appeal. From the facts placed before us, we find no infirmity in the order of Ld. CIT(A). In the case of Emmsons International Ltd. [2019] 112 taxmann.com 205 (Delhi - Trib.), where assessee engaged in business of international trading in commodities, suffered foreign currency loss on I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 18 foreign exchange forward contracts, loss so incurred was to be allowed as business loss. The Mumbai Special Bench in the case Dy. CIT v. Bank of Bahrain and Kuwait [2010] 41 SOT 290 has held that MTM losses in respect of forward foreign exchange contracts debited to profit and loss account is an allowable expenditure. In the case of Quality Engineering & Software Technologies (P.) Ltd. [2014] 52 taxmann.com 515 (Bangalore - Trib.) where assessee-company entered into forward contracts in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds and there was an actual contract for sale of merchandise, said transaction would not qualify to be called as speculative transaction and therefore, provision for losses incurred on derivative contracts was an allowable expenditure. 30. In the result, in light of the above observations, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 31. In the result, ground number 2 of the Department’s appeal is dismissed. Ground No. 3 (ld. CIT(A) erred in deleting disallowance of loss of Rs. 39,03,002/- made by the Assessing Officer on account of retrenchment compensation paid to workers 32. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer made a disallowance of Rs. 39,03,002/- on account of deduction of retrenchment compensation paid to workers, on the ground that such compensation paid to workers was not I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 19 claimed by the assessee in the return of income and was claimed in the revised computation of income filed during the course of assessment proceedings. The Assessing Officer by relying on the case of Goetze India Ltd. supra did not entertain the claim of the assessee made during the course of assessment proceedings. 33. In appeal before ld. CIT(A), the assessee submitted that every year, some of the posts of the workers are abolished and discontinued due to improving technology and hence retrenchment compensation has to be paid to such employees which is in the form of gratuity and compensation. The assessee further submitted that during the assessment year 2010-11 in its order u/s. 143(3) r.w.s. 144C dated 14-03-2014, the Assessing Officer has duly allowed the expenditure of retrenchment compensation paid to the employees by the assessee. The ld. CIT(A) allowed the assessee’s appeal with respect to this ground of appeal by holding that in the case of CIT vs. Swan Mills 220 taxman 10 and in the case of CIT(A) vs. Faisal Ltd. 330 ITR 62, the Courts held that payment on account of gratuity, retrenchment compensation and leave encashment made to workers in connection with the voluntary retrenchment scheme was an allowable revenue expenditure. Accordingly, the ld. CIT(A) held that the above expenditure of Rs. 39,03,002/- on account of retrenchment compensation can be claimed by the assessee as business expenses. 34. Before us, the ld. Departmental Representative relied upon the observations made by the Assessing Officer in the assessment order. In response, the counsel for the assessee placed reliance on the observations made by the CIT(A) in the appellate order. From the facts placed before us I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 20 and the observations of ld. CIT(A), we find no infirmity in the order of ld. CIT(A) with respect to this ground of appeal so as to interfere with the same. Notably, even the Assessing Officer in the assessment order for succeeding assessment year 2010-11 has allowed the assessee’s claim of expenditure of retrenchment compensation paid to the employees. 35. In the result, ground no. 3 of the Department’s appeal is dismissed. Ground No. 4: Ld. CIT(A) erred in deleting addition of Rs. 10,90,000/- made by the Assessing Officer being 1/5 th of the expenditure of ICICI loan processing fees. 36. The brief facts in relation to this ground of appeal are that the assessee incurred expenditure of Rs. 54,50,000/- on account of loan processing fees in assessment year 2005-06. The assessee divided the aforesaid expenditure equally into five years i.e. claimed expenditure of Rs. 10,90,000/- beginning with assessment year 2005-06 till assessment year 2009-10. During the course of assessment, the Assessing Officer made an addition of Rs. 10,90,000/- being the disallowance 1/5 th of the expenditure of ICICI loan processing fees by treating the aforesaid expenditure as prior period expenditure pertaining to assessment year 2005-06. 37. In appeal, before ld. CIT(A), the assessee submitted that in all the earlier years i.e. assessment years 2005-06 to 2008-09, the Assessing Officers have dully accepted the claim of 1/5 th of the total expenditure being Rs. 10,90,000/- while passing the assessment order u/s. 143(3) of the Act. In the light of above facts, ld. CIT(A) allowed the assessee’s appeal by I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 21 holding that the assessee should be allowed deferred revenue expenses during the year under consideration amounting to Rs. 10,90,000/-. The Department is in appeal before us against the aforesaid deletion made by the ld. CIT(A). 38. We observe that for all the earlier years, the Department has itself accepted the assessee’s claim of allowance of 1/5 th of the expenditure amounting to Rs. 10,90,000/-. The Department has not brought forth any change in facts relating to this assessment year as compared to previous assessment years. The ld. Departmental Representative has further not challenged the genuineness of expenses. Accordingly, we find no infirmity in the order of ld. CIT(A) so as to call for any interference. 39. In the result, ground no. 4 of the Department’s appeal is dismissed. 40. In the result, appeal of the Department is dismissed for assessment year 2009-10. Now we shall take up appeal of the assessee for assessment year 2010- 11 (ITA Number 366/Ahmedabad/2017) 41. The assessee has taken the following Grounds of Appeal: Ground No. 1: CIT(A) erred on facts in dismissing the appellant’s ground challenging action of the Assessing Officer in referring the case to transfer pricing officer for computation of arms length price in relation to alleged international transactions Soma Textile FZE 100% subsidiary of the assessee company. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 22 Ground No. 2: Ld. CIT(A) erred in confirming the addition of Rs. 3,94,94,555/- made by the Assessing Officer on account arms length price of loan interest 42. We observe that this issue has been decided against the assessee while dealing with Grounds of Appeal 1 and 2 for assessment year 2009-10, since the matter has been decided by the ITAT against the assessee by Hon'ble ITAT in the assessee’s own case for assessment year 2008-09 in ITA Number 472/A/2014. 43. Accordingly, Grounds of Appeal Numbers 1 and 2 of the assessee’s appeal are dismissed. Ground No. 3: Ld. CIT(A) has erred in confirming addition on account of interest charged @5.58% on addition of arm’s length price of loan interest 44. We observe that this issue has been decided in favour of the assessee while dealing with Ground of Appeal No. 3 for assessment year 2009-10, since the matter has been decided by the ITAT in favour of the assessee by Hon'ble ITAT in the assessee’s own case for assessment year 2008-09 in ITA Number 472/A/2014. 45. Accordingly, Grounds of Appeal Number 3 of the assessee’s appeal is allowed. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 23 Ground No. 4: Ld. CIT(A) has erred in confirming disallowance of 1/5 th of GDR issue expenses claimed by the company as allowable deduction u/s. 35D of the Act 46. We observe that this issue has been decided against the assessee while dealing with Grounds Number 4 of assessee’s appeal for assessment year 2009-10 where the counsel for the assessee admitted that the issue has been decided against the assessee by Hon’ble ITAT for assessment year 2008-09 in ITA 472/Ahd/2014 and accordingly submitted that he shall not be pressing for ground no. 4 of his appeal. 47. Accordingly, Ground of Appeal Numbers 4 of the assessee’s appeal is dismissed for assessment year 2010-11. Ground number 5: Ld. CIT(A) erred in confirming addition on account of late remittance of employee’s contribution to PF and ESIC under section 36 (1) (va) of the Act. 48. We observe that this issue has been decided against the assessee while dealing with Grounds Number 7 of assessee’s appeal for assessment year 2009-10. 49. Accordingly, Ground Number 5 of the assessee’s appeal is dismissed for assessment year 2010-11. Ground number 6: Ld. CIT(A) erred in confirming addition on account of disallowance under section 40(a)(ia) of the Act. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 24 50. The brief facts in relation to this ground of appeal are that that the AO made addition of 3,92,791/ - under section 40(a)(ia) of the Act on the ground that the assessee did not deducted TDS on payments made to three parties. Before Ld. CIT(A), the assessee contended that all these parties were having PAN and therefore TDS was not required to be deducted. The Ld. CIT(A) dismissed the assessee’s appeal on the ground that since no details were filed by the assessee, the appeal of the assessee is liable to be dismissed. 51. Before us, counsel for the assessee submitted that there was no requirement to deduct tax at source under s 194C(6) of the Act on account of TDS on freight expenses since the three parties were having PAN and also were in possession of less than 10 vehicles and therefore there was no requirement to deduct tax at source under s 194C(6) of the Act. Before us, the counsel for the assessee also produced details of PAN of the aforesaid parties. 52. In view of the above facts, we observe that since the above details were not produced for verification before either the Ld. CIT(A) or the AO, in the interest of justice, this issue is being set aside to the file of AO to carry out the necessary verification and allow relief to the assessee, in accordance with law. 53. In the result, ground number 5 of the assessee’s appeal is allowed for statistical purposes. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 25 In the result, the appeal of the assessee is partly allowed for assessment year 2010-11. Now we shall take up assessee’s appeal for assessment year 2011-12 Ground No. 1: CIT(A) erred on facts in dismissing the appellant’s ground challenging action of the Assessing Officer in referring the case to transfer pricing officer for computation of arms length price in relation to alleged international transactions Soma Textile FZE 100% subsidiary of the assessee company. Ground No. 2: Ld. CIT(A) erred in confirming the addition of Rs. 1,86,51,314/- made by the Assessing Officer on account arms length price of loan interest 54. We observe that this issue has been decided against the assessee while dealing with Ground of Appeal Nos. 1 and 2 for assessment year 2009-10, since the matter has been decided by the ITAT against the assessee by Hon'ble ITAT in the assessee’s own case for assessment year 2008-09 in ITA Number 472/A/2014. 55. Accordingly, Grounds of Appeal Numbers 1 and 2 of the assessee’s appeal are dismissed. Ground No. 3: Ld. CIT(A) has erred in confirming addition on account of interest charged @4.59% on addition of arm’s length price of loan interest I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 26 56. We observe that this issue has been decided in favour of the assessee while dealing with Ground of Appeal No. 3 of the assessee’s appeal for assessment year 2009-10, since the matter has been decided by the ITAT in favour of the assessee by Hon'ble ITAT in the assessee’s own case for assessment year 2008-09 in ITA Number 472/A/2014. 57. Accordingly, Ground Numbers 3 of the assessee’s appeal is allowed. Ground number 4: Ld. CIT(A) erred in confirming addition on account of late remittance of employee’s contribution to PF and ESIC under section 36 (1) (va) of the Act. 58. We observe that this issue has been decided against the assessee while dealing with Ground Number 7 of assessee’s appeal for assessment year 2009-10. 59. Accordingly, Ground Number 4 of the assessee’s appeal is dismissed for assessment year 2011-12. 60. In the result, appeal of the assessee is partly allowed for assessment year 2011-12. Now we shall take up assessee’s appeal for assessment year 2013-14 Ground No. 1: CIT(A) erred on facts in dismissing the appellant’s ground challenging action of the Assessing Officer in referring the case to transfer pricing officer for computation of arms length price in I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 27 relation to alleged international transactions Soma Textile FZE 100% subsidiary of the assessee company. Ground No. 2: Ld. CIT(A) erred in confirming the addition of Rs. 85,97,598/- made by the Assessing Officer on account arms length price of loan interest 61. We observe that this issue has been decided against the assessee while dealing with Grounds of Appeal 1 and 2 for assessment year 2009-10, since the matter has been decided by the ITAT against the assessee by Hon'ble ITAT in the assessee’s own case for assessment year 2008-09 in ITA Number 472/A/2014. 62. Accordingly, Grounds of Appeal Numbers 1 and 2 of the assessee’s appeal are dismissed. Ground No. 3: Ld. CIT(A) has erred in confirming addition on account of interest charged @3.28% on addition of arm’s length price of loan interest 63. We observe that this issue has been decided in favour of the assessee while dealing with Ground of Appeal No. 3 for assessment year 2009-10, since the matter has been decided by the ITAT in favour of the assessee by Hon'ble ITAT in the assessee’s own case for assessment year 2008-09 in ITA Number 472/A/2014. 64. Accordingly, Ground Numbers 3 of the assessee’s appeal is allowed. I.T.A Nos. 3491/Ahd/2016, 17 & 366/Ahd/2017, 81 & 82/Ahd/2021 Page No. DCIT vs. Soma Textiles & Industries + Soma Textiles & Industries vs. Addl/DCIT 28 Ground number 4: Ld. CIT(A) erred in confirming addition on account of late remittance of employee’s contribution to PF and ESIC under section 36 (1) (va) of the Act. 65. We observe that this issue has been decided against the assessee while dealing with Ground Number 7 of assessee’s appeal for assessment year 2009-10. 66. Accordingly, Ground Number 4 of the assessee’s appeal is dismissed for assessment year 2013-14. 67. In the result, appeal of the assessee is partly allowed for assessment year 2013-14. 68. In the combined result, the appeals of the assessee are partly allowed and appeal of the Department is dismissed. Order pronounced in the open court on 15-02-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 15/02/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकारआयकर अपील य अ धकरण, अहमदाबाद