Facts of the Case

The assessee imported goods from its holding company, Denso Corporation, Japan. The Assessing Officer disallowed an amount of ₹69,62,655 under Sections 92 and 40A(2) on the basis that the imported goods were purchased at prices higher than similar goods procured from local vendors.

The CIT(A) found that the comparison adopted by the Assessing Officer was factually incorrect because the imported prices were compared with local market prices prevailing in subsequent years rather than in the relevant assessment year. The CIT(A), therefore, deleted the addition, and the Tribunal affirmed the deletion.

Another dispute related to expenditure of ₹2,11,20,147 incurred under technical service and personnel-related agreements with Denso Corporation, Japan. The Tribunal treated 25% of the expenditure as capital expenditure while the assessee contended that the entire expenditure should be allowed as revenue expenditure.

The Revenue further challenged the allowance of foreign exchange fluctuation loss.

Issues Involved

  1. Whether the ITAT was correct in deleting the addition of ₹69,62,655 made under Section 92 read with Section 40A(2) of the Income-tax Act, 1961.
  2. Whether the ITAT was justified in treating only ₹52,80,000 out of ₹2,11,20,147 as capital expenditure.
  3. Whether the ITAT was correct in allowing loss arising on account of foreign exchange fluctuation.

Petitioner’s Arguments (Revenue)

  • The Assessing Officer had rightly disallowed ₹69,62,655 under Sections 92 and 40A(2) on the ground that the assessee purchased goods from its related foreign entity at prices higher than comparable local purchases.
  • The Tribunal erred in restricting the amount treated as capital expenditure to only 25% of the total expenditure.
  • The Tribunal wrongly allowed the foreign exchange fluctuation loss claimed by the assessee.

Respondent’s Arguments (Assessee)

  • The comparison adopted by the Assessing Officer was fundamentally flawed because imported prices were compared with local market prices prevailing in subsequent years and not during the relevant year.
  • The deletion of the addition was based on proper factual appreciation by the appellate authorities.
  • The expenditure incurred under technical service arrangements was primarily revenue in nature.
  • The foreign exchange fluctuation loss was allowable in view of settled judicial precedents.

Court Findings

On Foreign Exchange Fluctuation Loss

The Delhi High Court observed that the issue was already covered by its earlier decision in Commissioner of Income Tax vs Woodward Governor India Pvt. Ltd. (249 ITR 451), which had subsequently been affirmed by the Supreme Court in Commissioner of Income Tax, Delhi vs Woodward Governor India Pvt. Ltd. (312 ITR 254). Therefore, no substantial question of law survived on this issue.

On Addition under Sections 92 and 40A(2)

The Court noted that the Assessing Officer compared the prices of imported goods with local market prices prevailing in subsequent years. Such comparison was not legally sustainable because the correct comparison ought to have been made with prices prevailing during the same year.

The CIT(A) and ITAT had recorded concurrent findings of fact that the basis adopted by the Assessing Officer was erroneous. Since the findings were purely factual, no substantial question of law arose for consideration.

On Capital vs Revenue Expenditure

The Tribunal had capitalized 25% of the expenditure and relied upon the Supreme Court decision in Southern Switch Gear Ltd. vs CIT (1998) 232 ITR 359.

The High Court observed that even according to the Revenue's challenge, the dispute was limited to the extent of capitalization. The assessee had separately challenged the Tribunal's order contending that the entire expenditure should be treated as revenue expenditure. Therefore, no substantial question of law arose in the Revenue's appeal.

Court Order

The Delhi High Court held that:

  • The findings regarding deletion of addition under Sections 92 and 40A(2) were purely factual.
  • The issue relating to foreign exchange fluctuation loss was already covered by binding precedent.
  • No substantial question of law arose from the Tribunal’s order.

Accordingly, the appeal filed by the Revenue was dismissed.

Important Clarification

  • For benchmarking purchases from related parties, comparisons must be made with comparable prices prevailing during the same relevant period and not with prices prevailing in subsequent years.
  • Concurrent findings of fact by CIT(A) and ITAT ordinarily do not give rise to a substantial question of law.
  • Foreign exchange fluctuation losses were held to be governed by the principles laid down in the Woodward Governor decisions.
  • The judgment reinforces the distinction between factual findings and substantial questions of law in income-tax appeals.

Sections Involved

  • Section 92 of the Income-tax Act, 1961
  • Section 40A(2) of the Income-tax Act, 1961

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9422-DB/AKS05112009ITA1002009_152216.pdf

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