M/s FMC India Private Limited , Bangalore V. The Deputy Commissioner of Income Tax Circle-3(1)(1), Bangalore

MA 82/BANG/2022

AI Insights

The case involves M/s. FMC India Pvt. Ltd., the appellant, contesting the disallowance of a foreign exchange fluctuation loss on ECB loans amounting to Rs.1,03,58,338 by the Deputy Commissioner of Income Tax, the respondent. The Tribunal initially disallowed the claim under Section 35(1)(iv) of the Income Tax Act, considering the loss as notional. However, upon reviewing the submissions and precedents cited by the appellant, including a decision by the Hon'ble Pune Tribunal, the Tribunal acknowledged the need to adjust the actual cost of the assets due to foreign currency fluctuations as per Section 43A. The Tribunal also addressed other grounds related to the computation of operating margins and the treatment of product development expenses, restoring some issues to the Assessing Officer for re-examination.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124513 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 21-06-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 22-09-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 16-08-2022
• Other Referred Cases: Aesseal India Pvt. Ltd. vs. ITO, Arvind Mills Ltd. vs. CIT, Southern Asbestos Cement Ltd. vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Revenue expenditure
• Section: 32; 205

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) Assessment Year : 2014-15 M/s. FMC India Pvt. Ltd., #6, 13 th Main, Vasanth Nagar, Bangalore. PAN: AAACF4579N Vs. The Deputy Commissioner of Income Tax, Circle 3 (1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Nageswar Rao, Advocate Revenue by : Smt. Priyadarshini Baseganni, Addl. CIT (DR) Date of Hearing : 23-09-2022 Date of Pronouncement : 22-06-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present miscellaneous petition is filed by assessee against the order passed by this Tribunal dated 25/02/2022 alleging certain typographic mistakes that has crept in. 2. The first issue raised by the Ld.AR is that Ground no. 5 raised by assessee was challenging the disallowance of foreign exchange fluctuation on ECB loans amounting to Rs.1,03,58,338/-. The Ld.AR referred to the observations of this Tribunal on this issue which is recorded in para 7.1 as under: Page 2 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) “7.1 We heard the parties on this issue and perused the record. We earlier noticed that the AO had disallowed the claim for deduction of capital expenditure u/s 35(1)(iv) of the Act. In the preceding paragraphs, we have confirmed the said disallowance. We also directed the AO to allow applicable depreciation on the capital expenses so disallowed. Consequent thereto, the claim of deduction of loss arising on revaluation of outstanding balance of ECB cannot be allowed u/s 35(1)(iv) of the Act. We noticed that the AO has disallowed the claim holding it to be notional loss. Though the view taken by the AO may not be right, yet the disallowance has to be confirmed for the reasons discussed above. Accordingly, we confirm the disallowance of Rs.1,03,58,838/- made by the AO. It is not clear as to whether the provisions of sec.43A would apply to the ECB loan. Hence the assessee may claim the benefit of provisions of sec.43A, if it is applicable to the ECB Loan repayments.” 3. It is the submission of the Ld.AR that, all the relevant details were available on the record and therefore the observation that there was absence of relevant information is factually incorrect. The Ld.AR further submitted that the foreign exchange loss was in relation to ECB amounting to USD 20,00,000 obtained by assessee from its AE which was utilised majorly in assessment year 2013-14 for acquisition of assets to be used for purposes of R&D activities that was integral part of the assessee’s business. It is also submitted that the assessee has earned income from R&D activity. The Ld.AR submitted that this Tribunal held in respect of the disallowance of capital expenditure being upheld u/s. 35(1)(iv) on this issue, and granted depreciation. He submitted that, the said issue has been decided in paras 5.5 and 5.6 of the order in the said manner. 3.1. The Ld.AR submitted that, in respect of the loss that arose out of revaluation of outstanding liabilities this Tribunal disallowed sum of Rs.1,03,58,838/- by observing that 43A provisions may not be applicable to the ECB loan in para 7.1 reproduced hereinabove. 4. The Ld.AR submitted that assessee at the time of hearing relied on the decision of Hon’ble Pune Tribunal in case of Aesseal India Pvt. Ltd. Page 3 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) vs. ITO in ITA Nos. 2202 & 2203/PUN/2017 for A.Ys. 2012-13 & 2014- 15 by order dated 29.10.2020 wherein a similar situation was considered by directing necessary adjustment to be made to the actual cost on account of loss due to foreign currency fluctuation rate. He submitted that inadvertently the submission by him has not been considered. The Ld.AR thus prayed for a similar direction to be granted in para 7.1 of the impugned order. We have heard the submissions and also verified the log book on the relevant date when the appeal was originally heard. 5. By way of this miscellaneous petition on this issue, the Ld.AR mainly argued two issues being allowability of foreign exchange fluctuation as deduction u/s. 35(1)(iv) of the Act. This in our view amounts to review, as the Tribunal in paras 5.5 & 5.6 of the impugned order disallowed the claim of assessee and directed to capitalise the cost of asset by granting depreciation. However, in respect of the adjustment that is to be provided as per provisions of section 43A, we note that there is a reference to the decision of Hon’ble Pune Tribunal in case of Aesseal India Pvt. Ltd. vs. ITO (supra) in our log book. Certain direction therefore needs to be given pursuant to the reliance placed by assessee at the time of original hearing date, on the decision of Hon’ble Pune Tribunal that forms part of our notings in the log book also. Therefore para 7.1 henceforth shall be read as under: “7.1 We heard the parties on this issue and perused the record. We earlier noticed that the AO had disallowed the claim for deduction of capital expenditure u/s 35(1)(iv) of the Act. In the preceding paragraphs, we have confirmed the said disallowance. We also directed the AO to allow applicable depreciation on the capital expenses so disallowed. Consequent thereto, the claim of deduction of loss arising on revaluation of outstanding balance of ECB cannot be allowed u/s 35(1)(iv) of the Act. We noticed Page 4 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) that the AO has disallowed the claim holding it to be notional loss. Though the view taken by the AO may not be right, yet the disallowance has to be confirmed for the reasons discussed above. Accordingly, we confirm the disallowance of Rs.1,03,58,838/- made by the AO. However, section 43A provides for certain adjustments in the actual cost of asset due to change in the foreign currency exchange rate. The Institute of Chartered Accountants of India also has issued Accounting Standard 11 which provides for adjustment in carrying cost of fixed asset acquired in foreign currency due to foreign exchange fluctuation. On this aspect, Hon’ble Pune Tribunal (supra) has observed as under: “Thus, the unamended provisions of section 43A of the Act provides for the adjustment has to be carried out in the actual cost of the assets on account of change in the rate of exchange. The provisions of section 43A of the Act were amended by the Finance Act, 2002 w.e.f. 1.4.2003 to provide that for making the necessary adjustments in the carrying cost of the fixed asset there should be actual cost, on increase or decrease of liability as a consequence of exchange variation infact actual payment of liability. But on plain reading of the provisions of section 43A of the Act, it is clear that provisions of section 43A have application only in the case of imported assets. ............. The Hon'ble Supreme Court in the case of Arvind Mills Ltd. (supra) observed as under :- "We may now turn to the second question posed earlier and consider the position on general principles. So far as depreciation allowance is concerned, the position is perhaps a little simpler because it is a recurrent claim. Under the definitions contained in section 32 read with section 43(1) and (6) of the Income tax Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist, and for the Income tax Officer to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of Page 5 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) the increased cost minus depreciation earlier allowed on the basis of the old cost. Thus, in the illustration given earlier, if the asset is one that earns depreciation at 10%, the assessee would have got a depreciation allowance of Rs. 10,000 for the assessment year 1966-67 and that will stand. But, for the assessment year 1967-68, the depreciation allowance will be calculated on an actual cost of Rs. 1,20,000 minus the depreciation earlier allowed of Rs. 10,000, i.e., on Rs. 1,10,000. The written down value and allowances for subsequent years will be calculated on this footing. In other words, though the depreciation granted earlier will not be disturbed, the assessee will be able to get a higher amount of depreciation in subsequent years on the basis of the revised cost and there will be no problem." 11. Even the Hon'ble Madras High Court in the case of Southern Asbestos Cement Ltd. vs. CIT, 259 ITR 631 had also followed the Hon'ble Supreme Court's decision in the case of Arvind Mills Ltd. (supra) and in the light of the law laid down by the Hon'ble Supreme Court in the case of Arvind Mills Ltd. (supra), we hold that the necessary adjustments should be made to the actual cost of assets on account of loss consequent to foreign currency fluctuation rate as there is no dispute that ECB loans are utilized for the purpose of acquisition of asset in India.” We accordingly direct the Ld.AO to verify the details and to compute necessary adjustment if any available to assessee having regards to the principles laid down hereinabove by Hon’ble Pune Tribunal.” 6. The next error pointed out by the Ld.AR is in respect of non- granting of working capital adjustment in respect of the foreign exchange loss that pertains to financing activity and therefore deserves to be excluded while computing operating margin of the assessee. The Ld.AR submitted that while this Tribunal in para 4.4 categorically recorded that assessee is only pressing Ground nos. 2.6 and 2.10. The Ld.AR submitted that Additional Ground no. 2.11 was argued as a consequential effect to Ground nos. 3,5 and 8 which this Tribunal has considered in paragraphs 5, 7 & 10 (including all the respective internal paragraphs). However there is no categorical observation in respect of the same. On perusal of the additional Page 6 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) ground raised by the assessee vide application dated 05.04.2019, the Ld.AR submitted that additional ground no. 2.10 was considered by this Tribunal in para 4.4, however missed out giving direction in respect of additional ground no. 2.11. 7. We note that this Tribunal in para 10.3 directed the Ld.AO to examine the loss arising out of revaluation of ECB loan and to grant deduction in respect of the losses that pertains to the revenue account. We note that the items that will have a material effect on the net profit margin, has to be eliminated while computing the margin of the assessee as per Rule 10B(3) of the IT Rules. We therefore in continuation to para 10.3 direct the Ld.AO to exclude such items that could materially effect the net margin of the assessee as compared to the comparables in an uncontrolled transaction. Accordingly, Ground no. 2.11 raised by assessee stands partly allowed for statistical purposes. 8. The next error alleged by the assessee is in respect of Ground no.6 that has been considered by this Tribunal in para 8.4. This Tribunal in para 8.4 observes as under: “8.4 Hence, it is necessary to find out as to whether the assessee has incurred all these expenses on its own account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses are not capital in nature. The facts available on record are not clear as to whether these expenses are routine expenses incurred for expansion of existing business or not. If it is so, then the relevant expenses are allowable as revenue expenditure. In the absence of relevant details, we feel it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. Accordingly we restore this issue to the file of AO.” 9. The Ld.AR submitted that assessee had filed relevant details in respect of the product development expenses before the Ld.AO, the list of such was placed at page 197 of the paper book. Page 7 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) 10. The Ld.AR submitted that, in the paper book filed before this Tribunal, the details were placed at page 205. Therefore the Ld.AR submitted that, the observation of this Tribunal in para 8.4 is contrary to the facts argued in respect of this ground. On verification of the log book and the records placed before us, we note that the submissions of the assessee is correct. 11. Accordingly, in para 8.4 the underlined portion is modified and shall be read as under: “8.4............................... If it is so, then the relevant expenses are allowable as revenue expenditure. . The details filed by assessee placed at page 205 of the paper book may be considered by the Ld.AO for examining the claim afresh in the light of discussions made (supra) and also in accordance with law. Accordingly, we restore this issue to the file of AO.” 12. The next error alleged by the assessee is in respect of treatment of product development expenses for purposes of computation of operating margin of the assessee. We note that this issue is already connected with the ground no. 6 which is already decided by this Tribunal in para 8 and accordingly, no separate direction needs to be given in respect of the same. This issue raised by assessee is therefore dismissed. 13. The next error alleged by the assessee is in respect of observation by this Tribunal in para 10.5 while adjudicating ground no. 8. We are of the opinion that considering this ground as submitted by the assessee in the present miscellaneous petition amounts to review. It is a view expressed by this Tribunal which cannot be subject matter of adjudication in a miscellaneous petition. Accordingly, this issue raised by assessee stands dismissed. 14. The next issues raised by assessee in respect of ground nos. 2.7 and 2.8 having not adjudicated by this Tribunal cannot be considered as the Ld.AR had not argued these grounds. This we have noted it Page 8 of 8 M.P. No. 82/Bang/2022 (in ITA No. 3313/Bang/2018) from the log book and therefore we dismiss these issues as it does not give rise to any mistake apparent on record. In the result, the miscellaneous petition filed by assessee stands partly allowed. Order pronounced in open court on 22 nd June, 2023. Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 22 nd June, 2023. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore