2015 (5) TMI 40 - AT - Income Tax

Tribunal allows foreign exchange loss deduction, overturns professional fees disallowance, emphasizes consistent accounting.

M/s. Perfect Circle India Ltd. Versus DCIT

M/s. Perfect Circle India Ltd. Versus DCIT - TMI Issues Involved:1. Disallowance of foreign exchange loss on mark-to-market forward contracts.2. Disallowance of foreign exchange loss on cancellation of forward contracts.3. Disallowance of professional fees paid to a sister concern.4. Disallowance of share of common marketing expenses under Section 40(a)(ia).Issue-wise Detailed Analysis:1. Disallowance of foreign exchange loss on mark-to-market forward contracts:The assessee, engaged in manufacturing automobile parts, entered into forward contracts to hedge against currency fluctuation risks. The assessee incurred a loss of INR 18,22,633 on mark-to-market forward contracts. The Assessing Officer (AO) disallowed this loss, deeming it notional and non-deductible as business loss. The CIT(A) upheld this disallowance. The assessee argued that the loss was ascertained and consistently accounted for in previous and future years, and thus should be deductible under Section 37. The Tribunal, referencing the case of 'ACIT Vs. M/s S. Rajiv & CO.' and the Supreme Court decision in 'CIT v. Woodward Governor India (P.) Ltd.', held that such losses are allowable as business losses if they are integral to the business and not speculative. The case was remanded to the AO for verification.2. Disallowance of foreign exchange loss on cancellation of forward contracts:The assessee did not press this ground, and it was dismissed accordingly.3. Disallowance of professional fees paid to a sister concern:The assessee paid INR 1,23,90,218 as professional fees to Anand Automotive Systems Limited (AASL) for various services. The AO disallowed 20% of this expenditure, citing a lack of quantification of services. The CIT(A) upheld this disallowance. The assessee contended that the fees were for legitimate services consistently paid over years without prior disallowance. The Tribunal found the department's contradictory stance (disallowing expenses in the assessee's case while adding income in AASL's case) unjustified and allowed the expenditure as deductible.4. Disallowance of share of common marketing expenses under Section 40(a)(ia):The assessee paid INR 1,44,78,000 to Victor Gaskets India Limited (VGIL) for shared marketing expenses without deducting TDS. The AO disallowed this amount under Section 40(a)(ia) and alternatively disallowed 20% as excessive. The CIT(A) upheld the disallowance. The assessee argued that the payments were reimbursements, not income, and thus not subject to TDS. Alternatively, it was contended that VGIL had declared this income and paid taxes, invoking the second proviso to Section 40(a)(ia). The Tribunal, referencing the Bangalore bench decision in 'Shri S.M. Anand Vs. ACIT', held that the proviso is retrospective and remanded the issue to the AO for verification of VGIL's tax payments. The Tribunal also found no justification for the 20% ad-hoc disallowance if the claim was otherwise eligible.Conclusion:The appeal was partly allowed, with specific issues remanded for further verification and adjudication based on the Tribunal's guidelines. The Tribunal emphasized the importance of consistent accounting practices and the need for a fair assessment of legitimate business expenses.