Honda Motorcycle And Scooter India Pvt. ... vs Assessee

Assessee By : Shri Vijay Iyer, CA Department By : Shri Judy James, Standing Counsel

Date of Hearing : 01.04.2015 Date of Pronouncement : 13 .04.2015

ORDER PER R.S. SYAL, AM:

This appeal by the assessee is directed against the final order passed

by the Assessing Officer (AO) u/s 143(3) read with section 144C of the ITA No.1020/Del/2015 Income-tax Act, 1961 (hereinafter also called `the Act') on 16.01.2014 in

relation to the assessment year 2010-11.

2. First ground is against the addition towards the transfer pricing

adjustment amounting to Rs.22,13,13,283/- on account of two international

transactions, namely, Payment of export commission amounting to

Rs.17,50,15,000 and Payment of royalty for export to the Associated

Enterprises (AEs) at Rs.4,62,98,283.

3. Briefly stated, the facts of this ground are that like earlier years, the

assessee continued to manufacture two-wheelers by obtaining technology

from Honda, Japan. The assessee reported eight international transactions.

On a reference made by the AO, the Transfer Pricing Officer (TPO)

accepted six international transactions at arm's length price (ALP). As

regards the international transaction of `Payment of export commission',

the TPO held that no service was rendered by the AE to deserve export

commission. That is how, he determined the ALP of this international

transaction at Nil. As regards the international transaction of payment of

total royalty amounting to Rs.336,26,07,000/-, the TPO accepted the

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payment of royalty at arm's length price in respect of domestic sales and

export sales made to non-AEs. However, he disputed the payment of

royalty on exports made to AEs. In doing so, the TPO held the assessee to

be a `Contract manufacturer'. Accordingly, he opined that since the

assessee is making a part of its sales to the related parties and the benefit of

producing components is reaped by AE, the payment of royalty did not

conform to the arm's length principle. He, therefore, proposed the TP

adjustment amounting to Rs.4,62,98,283/- in respect of payment of royalty

for exports to AEs. The AO made the above additions by adopting the

figures from the TPO's order as such without any further evaluation. The

assessee is aggrieved against the making of such additions.

4. After considering the rival submissions and perusing the relevant

material on record, we find that similar issues were raised in appeals by the

assessee for the AYs 2008-09 and 2009-10, which came to be heard

simultaneously with the instant appeal. We have passed separate order for

the above referred two earlier years in which the question of determination

of ALP in respect of Export commission has been restored to the file of

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AO/TPO with certain directions and the payment of royalty for exports to

AE has been accepted at arm's length price. No distinguishing feature has

been brought to our notice in the facts of the instant year vis-à-vis those of

the above referred earlier two years. We adopt the same reasons for the

year under consideration as well and, accordingly, remit the international

transaction of `Payment of export commission' to the file of AO/TPO for

a fresh determination as per the guidelines given in our above referred

order and delete the addition on account of `Payment of royalty' in respect

of exports made to the AEs.

5. Ground nos. 2.1 and 2.2 are against the disallowance of

Rs.55,45,182/-, being Sales tool expenses incurred by the assessee.

6. After considering the rival submissions and perusing the relevant

material on record, we find that similar issue has been raised by the

assessee in its appeals for the AYs 2006-07, 2008-09 and 2009-10, for

which separate orders have been passed. In the order passed for the AY

2006-07, we have remitted the matter to the file of AO for deciding this

issue in conformity with the final view taken in earlier years. Since the

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fact-situation remains similar for the instant year as well, inasmuch as

neither the ld. AR nor the ld. DR could clearly inform about the final view

taken on this issue for the earlier years, we set aside the impugned order

and send the matter back to the file of AO for deciding it in conformity

with the view taken by us in our order for the A.Y. 2006-07.

7. Ground no. 2.3 is against the disallowance of Rs.1,30,67,871/-,

being the amount of depreciation on Foreign exchange (forex) loss of

Rs.5,22,71,487/- on the payment of model fees, which was capitalized by

the assessee as part of the cost of Intangible assets.

8. The factual matrix apropos this issue is that the assessee acquired

technical know-how in respect of some automobile models during the year

under consideration, which was capitalized as an `Intangible asset' and

depreciation was claimed thereon. The AO observed that between the date

of credit of acquisition price and the date of actual payment, the exchange

rate of rupee and Japanese yen fluctuated, as a result of which the assessee

suffered a forex loss of Rs.5,22,71,487/-. The cost of acquisition of the

said asset which was originally recorded at Rs.141,47,84,832/- swelled to

5 ITA No.1020/Del/2015

Rs.146,70,56,319/-, the incremental amount being the forex loss of

Rs.5.22 crore. The AO observed that the assessee deducted tax at source

u/s 195 of the Act only on the payment of Rs.141.47 crore and no tax at

source was deducted from the additional payment of Rs.5.22 crore on

account of fluctuation in foreign exchange rate. The assessee's contention

that no tax at source was required to be deducted on additional liability

falling on the assessee due to variation in the fluctuation in the foreign

currency rate at the time of payment, did not find favour with the AO.

He, therefore, disallowed depreciation on the corresponding amount of

Rs.5.22 crore, which resulted into disallowance of Rs.130,67,871/-. The

assessee is aggrieved against the disallowance made by the AO.

9. We have heard the rival submissions and perused the relevant

material on record. The facts of the case lie in a narrow compass inasmuch

as the assessee acquired the technical know-how and the invoice was

raised in Japanese yen. At the time of acquisition, the assessee translated

the invoice value from Japanese yen into Indian rupee at the rate prevailing

at that time and credited the converted amount of Rs.141.47 crore to the

6 ITA No.1020/Del/2015

account of the supplier of know-how. Tax was duly deducted at source on

this amount of Rs.141.47 crore at the time of credit, which was duly

deposited in the exchequer. This is an admitted position. The entire

controversy revolves around the additional sum of Rs.5.22 crore, which the

assessee became liable to pay because of difference in foreign currency

rate as on the date on which payment was actually made vis-à-vis the date

on which the amount was credited to the account of the payee towards the

cost of asset.

10. It can be noticed that the AO invoked the provisions of section

40(a)(i) to disallow the proportionate amount of depreciation on Intangible

asset towards the additional cost paid by the assessee due to change in the

foreign currency rate. The case of the AO is that the assessee was also

required to deduct tax at source u/s 195 on the additional amount due to

fluctuation in foreign exchange rate and such non-deduction led to the

invocation of section 40(a)(i). Section 40 with the caption `Amounts not

deductible' provides through sub-clause (i) of clause (a) that

notwithstanding anything to the contrary in sections 30 to 38, no

7 ITA No.1020/Del/2015

deduction shall be allowed for any sum in computing the income

chargeable under the head "Profits and gains of business or profession",

which is payable, (A) outside India; or (B) in India to a non-resident, not

being a company or to a foreign company, `on which tax is deductible at

source under Chapter XVII-B and such tax has not been deducted or, after

deduction, has not been paid during the previous year, or in the

subsequent year before the expiry of the time prescribed under sub-section

(1) of section 200'. Section 195 provides that a person responsible for

paying to a non-resident shall 'at the time of credit of such income to the

account of payee or at the time of payment thereof in cash or by issue of

cheque or draft or by any other mode, whichever is earlier deduct income-

tax thereon at the rates in force.' When we read section 40(a)(i) in

juxtaposition of section 195, the position which follows for disallowance

u/s 40(a)(i) is that there should be a sum on which tax is deductible at

source and the assessee fails to deduct the same. The stage of deduction of

tax at source has been set out by section itself. It clearly provides that the

deduction should be made `at the time of credit of such income to the

account of the payee or at the time of payment..., whichever is earlier.' 8 ITA No.1020/Del/2015

Thus it is clear that the deduction of tax at source on a single transaction is

contemplated at the earlier of the dates of credit or payment to the payee. It

is not on both the occasions. Once deduction of tax at source has been

made at the time of credit, which event occurs first, then there can be no

question of once again making deduction of tax at source on full or in part

at the time of payment. This position has been made clear by Rule 26 of

Income-tax Rules, 1962 with the heading `Rate of exchange for the

purpose of deduction of tax at source on income payable in foreign

currency', which provides as under:-

`For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income.

Explanation : For the purposes of this rule, "telegraphic transfer buying rate'', in relation to a foreign currency, means the rate or rates of exchange adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency where such currency is made available to that bank through a telegraphic transfer.'

9 ITA No.1020/Del/2015

11. A bare perusal of the above Rule indicates that the deduction of tax at

source on any income payable in foreign currency shall be made on the

amount deduced by converting foreign exchange liability into Indian

rupees at the telegraphic transfer paying rate 'as on the date on which the

tax is required to be deducted at source under the provisions of Chapter

XVIIB.' To put it simply, the deduction of tax at source should be made

from the income payable in foreign currency on the amount converted into

Indian rupees as per the TT buying rate on the date on which tax is

required to be deducted at source. The AO has held that Rule 26 operates

only in respect of income under the head `Salaries' on which tax is

required to be deducted at source u/s 192 and not on other payments

including section 195. It is discernible from the plain language of Rule 26

that the same is applicable in respect of provisions of Chapter XVIIB,

which covers sections 190 to 206AA. Not only section 192, but section

195 is also covered by the mandate of Rule 26. If we read section 195 on

one hand and section 40(a)(i) on the other in conjunction with Rule 26, the

position which emerges is that the deduction of tax at source is required at

the rate of exchange for the calculation of the value in rupees of such 10 ITA No.1020/Del/2015

income payable to an assessee outside India at the telegraphic transfer

buying rate of such currency as on the date on which the tax is required to

be deducted at source and the resultant date on which the tax is required to

be deducted at source is `the time of credit of such income to the account

of payee or at the time of payment thereof ...., whichever is earlier'. This

shows that the tax is required to be deducted at the first stage when the

amount of income is credited to the account of payee and, hence, deduction

of tax at source is also contemplated at that stage alone which is to be done

by converting foreign currency into TT buying rate at that particular date.

There is no warrant for accepting the Revenue's contention that the

deduction of tax at source should have been made at the later stage also on

the additional liability when the assessee made payment. In our considered

opinion, the Act does not require two phased deduction of tax at source on

one transaction, one at the time of credit and second at the time of actual

payment. Deduction of tax at source is required to be made only on one

occasion, which in the context of section 195 is, earlier of the time of

credit or the time of payment. Under such circumstances, the assessee

cannot be called upon to deduct tax at source on the additional liability 11 ITA No.1020/Del/2015

arising because of foreign exchange loss. If we take the contention of the

Revenue to a logical conclusion, then every case of payment in convertible

foreign exchange would require deduction of tax at source, firstly, at the

time of credit and secondly, at the time when additional liability is fastened

on it due to unfavourable rate of exchange. A very peculiar situation

would arise, if instead of the assessee suffering forex loss, gets forex gain

on account of favourable rate of exchange at the time of payment. Going

by the viewpoint of the Revenue, in that case, it would become liable to

refund a part of the amount of excess tax deducted at source at the first

instance at the time of credit to the account of the payee, which position is

manifestly contrary to the legislative intent and prescription. The crux is

that in both the situations, i.e., whether there is a forex loss or gain,

deduction of tax at source u/s 195 is contemplated only at the first stage of

the credit of income to the account of the payee. The higher or lower

liability due to foreign exchange loss or foreign exchange gain is

inconsequential in so far as deduction of tax at source u/s 195 is concerned.

Once there is no default on the part of the assessee in making deduction of

tax at source on the additional amount paid due to foreign exchange loss, 12 ITA No.1020/Del/2015

there can be no question of making any disallowance u/s 40(a)(i) of the

Act.

12. Our above conclusion is fortified from another angle as well. Section

32 of the Act provides for depreciation, inter alia, on intangible assets

acquired on or after the 1st day of April, 1998, which are owned, wholly or

partly, by the assessee and used for the purposes of the business or

profession. It provides that depreciation shall be allowed in the case of any

block of assets, at such percentage on the written down value thereof as

may be prescribed. Section 43A of the Act is a special provision

consequential to changes in rate of exchange of currency. This section

begins with a non-obstante clause and its relevant part provides as under :

43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment--

(a) towards the whole or a part of the cost of the asset; or

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(b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any,

the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from--

(i) the actual cost of the asset as defined in clause (1) of section 43;

..................

and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid:'

13. The mandate of this provision is that where an assessee has acquired

any asset from a country outside India and due to change in the rate of

exchange after the acquisition of such asset, the amount by which the

originally recorded liability increases or reduces, such increase or

reduction shall be added to or deducted, as the case may be, from the

actual cost of asset. The essence of this provision is that the payment made

for the acquisition of an asset should be considered as actual cost of asset

notwithstanding the increased or reduced cost recorded at the time of

acquisition of such asset. In other words, if liability of the assessee is

14 ITA No.1020/Del/2015

increased due to unfavourable fluctuation in the foreign exchange rate,

then, such increased liability will go to enhance the actual cost of the asset

and vice versa. It is this adjusted cost of acquisition which is considered

for the purposes of granting depreciation. The non-obstante clause in the

operating part of this section makes it explicitly clear that it is this

provision which shall apply in supersession of any other contrary provision

in so far as the computation of actual cost of an asset due to change in the

rate of foreign currency, is concerned. Once this, being a special

provision gets triggered on account of change in the rate of foreign

currency and provides for taking the cost of acquisition as so adjusted, we

cannot comprehend unadjusted cost, without adjustment due to change in

the rate of foreign currency, as actual cost. It is only this adjusted cost

which can be considered for allowing depreciation. The interpretation as

suggested by the Revenue in not considering the adjusted cost as the cost

of acquisition of capital asset for allowing depreciation, results into

distortion of the provisions of section 43A, which is impermissible. It,

therefore, follows that there can be no question of adopting unadjusted cost

of acquisition of asset for allowing depreciation by invoking the provisions 15 ITA No.1020/Del/2015

of section 40(a)(i) of the Act inasmuch as the depreciation is allowable

with reference to the adjusted cost of acquisition of the asset in terms of

section 43A. We, therefore, allow ground no. 2.3.

14. The last effective ground no. 2.4 about the disallowance of

depreciation of Rs.2,41,092/- by applying the depreciation rate of 10% on

signages instead of 15% claimed by the assessee, was not seriously

pressed because of the insignificance of the amount involved. This ground

is, therefore, not allowed.

15. In the result, the appeal is partly allowed.

The order pronounced in the open court on 13.04.2015.

Sd/- Sd/-

[GEORGE GEORGE K.] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated, 13th April, 2015. dk

16 ITA No.1020/Del/2015

Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.

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