Avaya India Pvt. Ltd. vs Addl. CIT, Spl. Range 1, New Delhi

PER S.RIFAURRAHMAN,AM:

The assessee filed misc. Application in ITA No.1958/Del/2017 passed vide order dated 17.01.2020 and the coordinate bench vide order dated 30.07.2025 in MA No.80/Del/2021 recalled the order to the limited extent of adjudicating ground no.5 raised by the assessee pertaining to the disallowance of depreciation of Rs.2,42,421/- on the issue of exchange loss capitalised to the cost of assets under section 43A of the Income-tax Act, 1961 (for short ‘the Act’). Accordingly, the present appeal is listed to the limited extent of deciding ground no.5 which is reproduced below:-

Brief facts of the case are, the assessee is a company engaged in the business of software programming and application development, and renders services on behalf of, and to, Avaya US and other Avaya group entities, being a service provider to its overseas Associated Enterprises ("AEs"). The assessee filed its return of income for Assessment Year 2012-13 on 28.11.2012, under the normal provisions of the Act.

The case was selected for scrutiny, and notices under sections 143(2) and 142(1), along with a detailed questionnaire, were issued to the assessee on 08.08.2013. During the course of assessment proceedings, the Assessee from time to time furnished the details called for by the Assessing Officer. Since the Assessee had entered into international transactions with its Associated Enterprises during the relevant year (as disclosed in Form 3CEB filed by the Assessee), the AO, with the prior approval of the ld. CIT, New Delhi, referred the matter under section 92CA of the Act to the Transfer Pricing Officer ("TPO") for determination of the Arm's Length Price ("ALP") of such international transactions.

Being aggrieved by the Draft Assessment Order, the Assessee filed its objections before the ld. DRP-I, New Delhi, on 16.03.2016, under section 144C(2) of the Act. The ld. DRP, after considering the Assessee's aforesaid objections, issued its directions under section 144C(5) of the Act, addressing each of the issues raised in the Draft Assessment Order. The AO thereafter passed the impugned final assessment order under section 143(3) read with section 144C(13) of the Act, giving effect to the DRP's directions, and assessing the total income of the Assessee at Rs.1,28,08,52,386/-.

With regard to Ground No.5, relevant facts are, the Assessee had filed, before the AO its Financial Statements for the relevant Assessment Year, the return of income in Form ITR-6, and the Auditor's Report along with Form 3CEB. It was noted from Schedule 2, Clause 14 to the financial statements that an exchange loss of Rs. 33,03,795/-, arising on account of an increase in foreign currency liability, had been capitalized to the cost of certain assets. The Assessee was called upon to furnish details and to justify the same.

Vide letter dated 15.01.2016, the Assessee submitted that the exchange loss arose on repayment of External Borrowings ("ECB") taken in earlier years for acquisition of capital assets from outside India, and that, under section 43A of the Act, where there is an increase or decrease in the liability (expressed in Indian currency) for repayment of monies borrowed in foreign currency for the acquisition of an asset from a country outside India, on account of a change in the rate of exchange, such increase or decrease is required to be added to, or deducted from, the actual cost of the asset. The Assessee accordingly capitalized the exchange loss to the cost of the relevant capital assets.

The Id. DRP observed that the AO had discussed the issue in detail and had pointed out that the Assessee failed to furnish the requisite details, or to controvert the AO's findings. On this basis, the Id. DRP upheld the disallowance in principle.

It was submitted before us that the Assessee had filed copious documents in support of its case before the Hon'ble DRP, by way of an application under Rule 4 of the Income Tax (Dispute Resolution Panel) Rules, 2009, dated 10.05.2016, dealing, at internal page 2 thereof, with the disallowance of 60% of the realised exchange loss capitalised to the cost of fixed assets. In support of its contention before the Id. DRP, the Assessee filed the extract of the ledger of realised exchange loss amounting to Rs. 33,03,795/- as Annexure 2, and the working of the realised exchange loss for certain sample payments made during the year, together with the complete set of invoices, ledger extracts, and payment confirmations, as Annexure 3.

However, the ld. DRP further observed and accepted the Assessee's contention that the quantum of disallowance had not been correctly computed by the AO, inasmuch as the rate of depreciation applied by the AO was incorrect and higher than the rate actually claimed by the Assessee. The ld. DRP accordingly directed the AO to examine the facts and to re-compute the amount of disallowance after correcting for the rate of depreciation actually applicable.

The AO had treated the exchange loss as notional and unsubstantiated, and held it to be not permissible to be capitalized and hence disallowed the corresponding depreciation. The AO presumed that depreciation had been claimed at the rate of 60% (applicable to computers), and accordingly disallowed depreciation of Rs.19,82,277/-, adding the same to the income of the Assessee.

Pursuant to the DRP's directions, the AO re-computed the disallowance on an asset-wise basis as under:

Being aggrieved by the final assessment order passed by the AO under section 143(3) read with section 144C(13) of the Act, giving effect to the directions of the ld. DRP, the Assessee preferred the present appeal before this Tribunal, being ITA No. 1958/Del/2017, challenging the additions/disallowances confirmed therein.

The above appeal finally disposed off by this Tribunal vide final order dated 17.01.2020. Since the findings on the remaining grounds already stand adjudicated by the said order and are not in issue before this Tribunal in the present proceedings, it is only relevant to state that Ground No. 5 was not adjudicated by the said order.

At the time of hearing, ld. AR submitted the following documents in support of Ground No. 5, pertaining to the disallowance of depreciation of Rs.2,42,421/- on the exchange loss capitalised to the cost of assets under section 43A of the Act –

He relied upon the aforesaid documents in support of its contention that the realised foreign exchange loss capitalised under section 43A had been correctly reported and fully documented, and was neither notional nor unsubstantiated, contrary to the findings of the AO and the ld. DRP.

Further he submitted that as stated above, in the course of the hearings, the Assessee relied upon the Asset Ledger reconciling the booking amount of each purchase invoice with the amount actually remitted to the respective overseas vendor on the date of payment, so as to demonstrate that the resultant exchange loss/gain claimed by the Assessee was realised (and not notional), and was traceable to specific underlying transactions, and was duly substantiated by supporting documents placed on record. He further submitted that in fact, set out below, by way of sample extracts from the Asset Ledger (filed completely), together with their corresponding page references, duly highlighted in the copy furnished to this Tribunal for the ready perusal of this Tribunal:

Further ld. AR submitted that in response to the AO's contention, the Assessee relied upon ld. DRP Ground 5 Paperbook to show the extract of the ledger of realised exchange loss amounting to Rs.33,03,794/-, along with the working of the realised exchange loss for certain sample payments made during the year, together with the complete set of invoices, ledger extracts, and payment confirmations pertaining thereto. In this regard, he submitted that the Assessee took this Tribunal through pages 4 and 5 of the said paperback, establishing the extract of the ledger of realised exchange loss amounting to Rs. 3,03,794/-. He further brought to our notice pages 6 and 7 of the said paperback, establishing, on a sample basis, the working of the foreign exchange gain/loss. He submitted that the said working reflected both foreign exchange loss and foreign exchange gain, both of which were duly capitalised under section 43A of the Act. He further submitted that the said figure of Rs.33,03,795/- was further substantiated by the Foreign Exchange Ledger, at page 6 thereof, extracted below for the ready perusal of this Tribunal:

He further brought to our notice Asset Ledger submitted along with the paper book as Annexure 3. On a sample basis, he brought to our notice Asset Ledger entries pertaining to Empirix. Further, he submitted that the corresponding journal/asset voucher, reflecting the particulars "Office Equipment, Tower 11", was shown at page 9, followed by the payment voucher for the said transaction, which was shown at page 10, which stood duly reflected in the Statement of Account provided at page 12, bearing the entry dated 24.08.2011. He further submitted that a similar exercise was undertaken in respect of the other vendors as well, including Redington, Avaya Australia, Avaya Inc. USA, and Nortel Networks. He submitted that the above was further corroborated by the Assessee by placing before this Tribunal the Foreign Exchange Ledger for FY 2011-12, and, on sample basis, the corresponding entry pertaining to Empirix at page 3 of the said ledger was shown, which is extracted below for the ready perusal of this Tribunal:

Ld. AR submitted that the said ledger, being maintained transaction-wise for each purchase invoice raised by the Assessee's overseas vendors and each corresponding remittance made against it, evidence that the exchange difference (loss/gain) arose on actual settlement/payment of the underlying foreign currency liability, and was not an estimated, provisional, or notional figure. It was accordingly submitted that the exchange loss capitalised to the cost of assets under section 43A of the Act was fully substantiated on a transaction-by-transaction basis, and that the findings of the AO and the ld. DRP that the loss was "notional and unsubstantiated" did not reflect the correct factual position, as would be evident from the said ledger and the underlying documents referred to therein.

It was further submitted that the complete Asset Ledger placed before this Tribunal contained particulars of all vendors/companies in respect of which capital assets had been acquired and capitalised by the Assessee, together with the corresponding foreign exchange gain/loss arising on settlement of each such transaction.

In further substantiation of Ground No. 5, he also placed before us :

Further, ld. AR of the assessee brought to our notice the following :

In view of the documents and submissions placed before us, ld. AR pleaded to allow ground no.5.

On the other hand, ld. DR of the Revenue brought to our notice orders of lower authorities and heavily relied on the detailed findings in final assessment order.

Considered the rival submissions and material placed on record. We observed that method of accounting followed are, the assessee purchases the capital goods and records the transaction by adopting exchange rate on the date of recording the relevant capital asset(s) and on the date of final settlement, the actual amount of remittance are being capitalised, if there is any exchange gain or loss are capitalised on the same date. This method of recording the transactions is regularly followed by it. In support of the same, it has filed the relevant ledgers of individual capital assets and also the exchange fluctuation ledger to demonstrate that it had not claimed exchange loss separately, rather it has capitalised the same by following the method of accounting specified u/s 43A of the Act. After considering the factual matrix on record, we observed that the AO had misunderstood the directions of Ld DRP, he proceeded to disallow the corresponding depreciation of the respective assets, which are already capitalised during the year. On careful perusal of the records submitted before us, we noticed that the assessee had already capitalised the above exchange loss as per the provisions of section 43A of the Act and also it had not claimed any separate exchange loss in their books of account,(technically it cannot claim once they capitalised the same) that being the case, disallowing the depreciation on the respective assets is not proper and not as per law. Therefore, we direct AO to delete the above disallowance.

In the result, the ground recalled for fresh adjudication is accordingly allowed.