TaxTMI 
TaxTMI 
2014 (8) TMI 869
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....; 1.1. On the facts and in the circumstances of the case and in law, the Ld. DRP/AO erred in treating the damages of Rs. 23,48,59,500/- incurred for breach of contract i.e. price difference on account of Sauda Cancellation in the course of its business as a 'speculative transaction' u/s 43(5) of the Act and such loss/ expense as speculative business loss and denied set off of such loss against income. The reasons given by them for doing so are wrong, contrary to the facts of the case and against the provisions of law. 1.2. On the facts and in the circumstances of the case and in law, the Ld. DRP/AO erred in treating damages incurred for breach of contract in the course of its business as a 'speculative transaction' u/s 43(5) of the Act solely on the basis of assumptions, presumptions and surmises without any evidence or conviction. 1.3. The Ld. DRP/ AO erred in law and facts in observing that the transactions were of accommodative nature without any evidence to prove such allegation. 1.4. The Ld. DRP/ AO failed to appreciate that the damages for breach of contract i.e. pr....
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....s before MOU dated: 23.08.2008 for Slump Sale of Haldia unit 13.10.2008 includes Bank charges of Rs. 1,300 1,39,08,400 Contract dated: 20.8.2008 just 3 days before MOU dated: 23.08.2008 for Slump Sale of Haldia unit 13.10.2008 includes Bank charges of Rs. 1,300 1,38,59,100 Contract dated: 20.8.2008 just 3 days before MOU dated: 23.08.2008 for Slump Sale of Haldia unit 13.10.2008 includes Bank charges of Rs. 1,300 4,32,48,750 Contract dated: 21.8.2008 just 3 days before MOU dated: 23.08.2008 for Slump Sale of Haldia unit 11.10.2008 includes Bank charges of Rs. 1,300 4,02,84,750 Contract dated: 18.8.2008 just 3 days before MOU dated: 23.08.2008 for Slump Sale of Haldia unit 2. M/s. K.S. Oil Limited of Morena (M.P.) 12.01.2009 3,39,00,000 Contract dated: 17.11.2008 2 and ½ months later of MOU dated: 23.08.2008 for Slump Sale of unit 12.01.2009 1,95,50,000 Contract dated: 17.11.2008 2 and ½ months later of MOU dated: 23.08.2008 for Slump Sale of unit 3. M/s.Mantora Oil Products Limited of Kanpur 25.10.2008 5,60,00,000 Contract dated: 21.08.2008 just 2 days before MOU dated: 23.08.2008 for Slump Sal....
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.... Assessment Year Gross Turnover of Business in Rs. Net Profit from Business in Rs. % of Net Profit w.r.t. Turnover 2007-08 Rs.240,27,87,494.10 Rs.1,50,27,129.80 Profit 0.625% 2008-09 Rs.471,37,28,304.82 Rs.10,36,21,473.92 Profit 2.20% 2009-10 Rs.355,20,46,432.37 Rs.69,21,96,427.52 (Loss) Loss 19.50% Finally in para 2.7 of assessment order, by following directions of Dispute Resolution Panel (DRP), AO made the following disallowance:- "2.7 On the basis of above finding the Sauda Cancellation Charges of Rs. 23,48,59,500/- was proposed to be disallowed vide draft assessment order, which was communicated to the assessee on 11/02/2013 u/s.144C(1) of the Income Tax Act, 1961. The assessee referred the issue to the Dispute Resolution Panel (D.R.P) by filing objection u/s. 144C(2)(b)(i). The D.R.P on examination of the facts and circumstances of the case rejected the assessee's objection vide it's order u/s. 144C(5) dated. 22/11/2013 received by the undersigned on 10/12/2013. The relevant part of para of the D.R.P's conclusion in page.24 is reproduced as under,  ....
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....ct by not supplying or refusing to take delivery, it has to pay damages to the other party as per FOSFA 81 and the terms specified in the contract. The ld. Counsel for the assessee stated that during the year under consideration, the assessee paid Sauda cancellation charges/damages for breach of contract to eight transactions involving three parties, where assessee refused to take delivery to contain further losses in falling market. Ld. Counsel of the assessee stated that assessee entered into MOU for transfer of entire Haldia unit to K.S. Oil Ltd. on 23.08.2008 and contracted these transactions from two parties between 18.08.2008 to 21.08.2008. Two contracts for supply of crude palm oil were entered into with K.S. Oil Ltd. on 17.11.2008. The assessee handed over its Haldia unit on 18.02.2009 to K.S. Oil Ltd. to execute the slump sale process. According to ld. Counsel, the AO, based his decision on the above facts that the intention of booking such huge losses was on the pretext of purchase agreement for crude palm oil, crude soya & refined oil and that also without taking delivery of goods. According to the AO, the intentions of assessee are very clear. The ld. Counsel for the as....
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....44 of the paper book. 4. As per the agreed terms and conditions, which are internationally accepted terms in the Edible Oil industry, if a contract is cancelled the cancelling party has to make good the losses of the other party due to breach of contract. It is basically damages for breach of contract. 5. Section 5 of the India Contract Act, 1872 also supports contention of the assessee that transactions of the assessee are not speculative in nature. 6. A "contract settled", as per section 43(5) means contract settled before it breaches. A breach puts an end to the contract and creates a liability in damages. Section 43(5) of the Act does not say that "a settlement of a claim for damages arising out of a breach of contract will be speculative transaction". 7. The DRP has also allowed damages paid for breach of contract relating to sale (Sauda settlement) as business expenditure u/s 37 of the Act. This damages were paid by assessee due to non-supply of material on due date to its buyers. Hence damages paid for breach of contract on purchase of CPO & RBD Palmolein should al....
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....sessee failed to take delivery of the ordered goods and the same was informed to the suppliers and as per practice in international trade in respect of these items dealt with by the assessee, the concerned parties agreed to cancel the contract on payment of damages. Such damages were agreed to be calculated on the basis of difference of contract price and price as prevailing on the date of refusal to accept these supplies and cancellation of contract. We find that the assessee has detailed out the complete quantity for which total purchase contract for crude palm oil and RBD palmolein were entered. These were not disputed by the revenue authorities and even now by Ld. CIT-DR. The relevant details are as under: "(i) Quantum of Crude palm oil : It may be noted that during the relevant previous year, total purchase contracts for Crude palm oil were for about 60911.60 MT. Out of which, the contracts which could not be executed and damage/ compensation in respect of which had to be paid were in respect of only 12,000 MT. These were in the course of regular business of the assessee. (ii) Quantum of RBD Palm Olein: It may be noted th....
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....ourse of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of the business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act,1956 (42 to 1956) carried out in a recognized stock exchange; or The following clause (e) shall be inserted in proviso to clause (5) of section 43 by the Finance Act, 2013, w.e.f. 1-4-2014: (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association." 9. On the above provision, we find that the assessee claimed that the above transactions were in regular course of business and were done considering the market conditions and business expediency. The assessee's claim was that with a view to avert further losses, in the case of falling prices, they decided not to accept certain supplies and accordingly, advised the suppliers. This process resulted into breach of contract and in turn has to pay damages/compensations as per the terms of the....
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....s aspect of the matter has been dealt with by the Bombay High Court in the case of CIT v. Kamani Tubes Limited: 207 ITR 298. In the said decision, the Bombay High Court, inter alia, held as under:- "On a careful reading of the provisions of sections 72 and 73, Explanation 2 to section 28 of the Act, it is abundantly clear that all these provisions are applicable only to treatment of profits and losses from a "speculation business". There is a perceptible difference between "speculative transaction" and "speculation business". An isolated transaction of settlement of a contract otherwise than by actual delivery of the goods might amount to "speculative transaction" within the meaning of section 43(5) of the Act but in the absence of something more to show that the nature of the transactions was such as to constitute a business, it cannot be termed as "speculation business" which has been treated as distinct and separate from other business." We entirely agree with the reasoning and the conclusion of the Bombay High Court in the said decision. Consequently, even if it is assumed for the sake of argument that the transactions in ....
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....ion from the category of speculative transactions. Learned counsel for the Revenue also submitted that in view of the Explanation 2 to section 28 of the Act, where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. That Explanation is not attracted here as the assessee was not carrying on a speculative business in the purchase or sale of cotton. Even assuming that the contract in question can be regarded as constituting speculative transactions, that by itself would not be the sufficient to hold that the assessee was carrying on a speculative business. The contracts were entered into in the ordinary course of business of running a textile mill and had been entered into bona fide to secure the supply of the raw materials required by it. The contracts were later cancelled only because that raw material was no longer fit for the assessee's use, having regard to the fact that a different variety of cotton was required for the manufacture of higher count of yarn. If all such contracts are excluded from the definition of specu....
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....r in the past and the above transactions were speculative transactions within the meaning of section 43(5) of the Act. They constituted a separate and distinct business as per Explanation 2 to section 28 of the Act. Therefore, a view was taken that the Assessing Officer was not justified in allowing deduction which was otherwise in-admissible under section 73(1) of the Act. Enhancement to the extent of Rs. 95,012 for the assessment year 1972-73 was made. The claim of the assessee for a sum of Rs. 43,808 which was allowed as a deduction for 1973-74 was set aside by the Commissioner of Income-tax (in short the "CIT") exercising power under section 263 of the Act. The orders of the Appellate Assistant Commissioner and the Commissioner of Income-tax were assailed before the Tribunal by the assessee. The assessee's stand was that there was no speculative profit or speculative loss involved. The loss that had been suffered by the assessee in the course of agency business, was incidental to it and should have been allowed as a normal business loss. The plea found acceptance by the Tribunal. On being moved, the Tribunal has referred a common question for the....
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....ontract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. This position was highlighted by the apex court in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57. In CIT v. Bhagwan Dass Rameshwar Dayal [1984] 149 ITR 387 (Delhi), the scope and ambit of section 43(5) of the Act was examined. It was observed that section 43(5) of the Act only covers cases where a contract is settled without breach and not cases where there is a breach followed by settlement of the quantum of damages. A transaction is considered to be speculative if it is settled without actual delivery but it does not follow that all contracts which are settled or adjusted without delivery are speculative. The word "settled" or "settlement" in connection with the contract has not been defined in the Act, or in the Contract Act or the Sale of Goods Act, or in any other statute. The following are the some of the meanings attributed to the word "settled" in the dictionaries: "Determined, deal effectively: dispose of: concl....
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....ngly. 13. Coming to the issue of revenue's appeal regarding allowance of damages for an amount of Rs. 50,91,187/-, the AO during the course of assessment proceedings, while drafting draft assessment order, observed that the price difference on account of delay or non-supply of goods under sales contract is speculative transaction u/s. 43(5) of the Act and such loss is speculation business loss, which cannot be set off against business income. We find that the DRP directed the AO to allow the claim of the assessee by observing as under: "The nature and circumstances of the transactions resulting in payment of damages for breach of contract to the tune of Rs. 50,91,187 were considered by this Panel. These payments have arisen on account of delayed supply against sales contracts. These payments were effected due to business expediency of the assessee and hence allowable as business expenditure u/s. 37 of the I. T. Act. Accordingly, the objection raised by the assessee is allowed." Aggrieved, revenue came in appeal before Tribunal. The Ld. CIT, DR relied on the draft assessment order of the AO and stated that this loss is a speculative loss. 14.....
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.... of following three parties: (i) Sree Vegetable Oil (P) Ltd. Rs.1.85 cr. (ii) Swastik Refinery Ltd. Rs. 1.00 cr. According to AO, the above two parties are related parties in term of section 40A(2)(b) of the Act. The AO based his decision just on the basis of Annexure "D" to the Tax Audit Report wherein both the parties have been shown as related parties without giving any nature of the transaction or details. Further, no details have been shown in respect to these transactions in the audit report. The AO made disallowance at Rs. 2,68,57,500/- out of the above rebate for the reason that sales to these related parties are 8% of the total sales but 95% of the total rebate and discount has been allowed to these two parties. According to AO, this is a colourable device to reduce tax liability. Hence, he disallowed the rebate to the extent of Rs. 2,68,57,500/-.....
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.... wherein complete list of shareholders along with no. of shares held by each shareholders is given in the case of Sree Vegetable Oil (P) Ltd. and Swastik Refinery Pvt. Ltd. and the list of directors of these two companies. When these were referred to Ld. CIT, DR, he could not point out how these are related parties in term of section 40A(2)(b) of the Act because if a related party in term of section 40A(2)(b) of the Act the beneficiary ownership has to be to the extent of 20%. We find that for invocation of provision of section 40A(2)(b) of the Act, the revenue has to come out, in view of the holding pattern of these three companies, how these are related parties in term of section 40A(2)(b) of the Act. We find that neither Sree Vegetable Oil (P) Ltd. nor Swastik Refinery Pvt. Ltd. or vice versa the assessee company Ambo Agro Products Ltd. holds the beneficiary ownership to the extent of 20% mentioned in Explanation (b) to section 40A(2)(b) of the Act. Under these circumstances, we feel that this addition cannot be sustained and accordingly, we delete the same. 18. The second issue in this appeal of revenue is as regards to the disallowance of deduction of PF and ESI. For thi....
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....ct, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees' contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal." 20. Once the issue is decided by Hon'ble jurisdictional High Court in the case of VijayShree Ltd. Supra, where in it is held that the PF & ESI are paid on or before the due date of filing of return u/s. 139(1) of the Act, deduction in respect to the amount on which PF &ESI is so paid, is allowable. In the present case the assessee has paid the PF & ESI before due date of filing of return u/s. 139(1) of the Act by the assessee, hence, we dismiss this ground of appeal of revenue. 21. The next issue in this appeal of revenue is against the directions of DRP to AO, not to make adjustment to the income of the assessee as determined by TPO in this order u/s. 92CA(3) of the Act. For this, revenue....
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....sociated Enterprises (AE), so the audit report in form No. 3CEB was filed and reference has been made to the Transfer Pricing Officer to assess the Arm's Length Price in respect of International Transactions with AEs. In view of this the Addl. DIT & TPO-II, Kolkata has determined an upward adjustment of Rs. 16,22,25,514/- (on account of higher payments than the prevalent market rate made to it's AEs) against the assessee vide order dated 30.01.2013 u/s. 92CA(3) of the I. T. Act, 1961 communicated vide M. No. Addl. DIT&TPO/II/Kol/92CA(3)/12-13/47. A copy of the same is enclosed for ready reference." The assessee claimed that during the year it sourced following material from the said AE: S. No. Particulars No. of Transactions Qty in MT Value (in Rs.) Remark (i) Raw Material imported: Crude Palm Oil 7 14019.615 71,55,28,816 Annex. (page 437) (ii) Trade/Finished Goods: RBD Palm Olien 10 19432.335 91,38,56.873 Annex. II (Page 438) Total 17 33451.950 1,62,93,85,689 The assessee contended before the AO as well as TPO that the comparable uncontrolled price (CUP) method was adopted for arriv....
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....an very well be gauged that the prices paid by the assessee company can not be compared with the prevalent market prices and need to be compared with the prevalent market prices and need to be adjusted to account for the difference in the prevalent market rates". After making various observations TPO concluded that to compute the arms length price under the CUP Method, the date of the FOB price on the date of the Invoice/Bill of Lading opening of LC is taken as the transaction price, suitably adjusted using the details of freight and insurance provided by the assessee itself in its TP Report. Thus, a TP adjustment of Rs. 16,22,25,514/- was proposed and AO included the adjustment in his draft assessment order. The assessee carried the matter to DRP. 24. The DRP decided the issue that the adjustment made by TPO is without any basis and the same should not be adjusted to the international transactions. For this, DRP observed as under: "We have carefully examined the issue raised in the objection no. 1.1 and find that the TPO has accepted the CUP method followed as also accepted the basis of comparison adopted by the Assessee. The dispute is in relatio....
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....a time gap between contract date and invoice date and prices fluctuate between these dates. Invoices are raised on the basis of accepted terms including rates as per the contracts entered earlier which are binding for all legal purposes. The following facts need to be considered: (i) The assessee has placed the price list published by MPOB at page 445 to 456 of assessee's paper book (for crude palm oil) and page 457 to 468 (for RBD palm oilen) which gives the daily prices of the commodities in the international market. Factually, there are different rates for each delivery date upto next three months. This affirms that the rate as per the contract with reference to delivery schedule is only relevant and the price on the date of dispatch/invoice is irrelevant except for breach of contract. (ii) Assessee also placed FOSFA 81, which is a general format of agreement published by Federation of Oils, Seeds and Fats Association Ltd. (FOSFA International) (pages 247 to 255 of assessee's paper book). This format is generally referred in all the contracts (e.g. page 560 to 572 and pages 612 to 625 contain some trade confir....
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....tered into with Associated Enterprise (AE). The TPO in the given case has not considered the fact that transactions with non-AEs are also carried out by the assessee at contracted/invoiced rates notwithstanding the rates prevailing on the date of invoice. 27. In the similar circumstances, Hon'ble ITAT, Chennai Bench in the case of Liberty Agri Products (P.) Ltd. v. ITO [2012] 49 SOT 79has ruled as under: "7. We heard both sides in detail and considered the issue. The TPO has no objection to the method of price analysis adopted by the assessee-company. There is no doubt that the assessee-company has entered into contracts of sale with its AE. After negotiations a contract price is agreed upon and the invoice is raised by the AE on the basis of that contract price. That contract price is comparable to the market rate available on the day of contract. Once the contract is entered into, the goods are moved from export destination to Kandla Port which is the import destination. Obviously, there is a time gap between the contract date and the date of entry. Because of this time gap between the contract date and entry date, there would be price fluctuati....