TaxTMI 
TaxTMI 
2015 (7) TMI 147
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....f collectively. For the sake of convenience and facts being similar in the common grounds, the facts are taken/reproduced from ITA No.3688/Del./2012 for Assessment Year 2002-03 wherever common grounds are taken for disposal. 4. Brief facts are that the assessee is a limited company incorporated under the Companies Act, 1956 on 26.07.1989. The assessee is engaged in the business of processing and trading of Rice, Pulses and Food products. The return of income for Assessment Year 2002-03 was filed declaring income at Rs. 1,11,92,422/- on 31.10.2012. A search and seizure operation was carried out u/s 132 of the Act on 05.12.2007 at the factory and business premises of the assessee. A notice u/s 153A of the Act was issued on 27.01.2009. The Assessing Officer made a reference to the special audit u/s 142(2A) vide order dated 09.09.2009. The Special Auditor submitted its report on 10.05.2011 and relying on the same, the Assessing Officer made the assessment on the income of Rs. 19,28,42,391/-. 5. The grounds of appeal taken by the assessee in ITA No.3688/Del/2012 read as under :- "1. That the assessment order passed u/s 153A rws 143(3) rws 144C is illegal, bad in law, with....
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....itrary, against the principles of natural justice, highly excessive and have been made without giving reasonable and proper opportunity to the assessee. 10. That the documents/explanations filed by the assessee and the material available on record have not been properly considered and judicially interpretated. 11. Regarding addition of Rs. 2,73,58,354/- on account of alleged discrepancies in Trading results. (a) That the AO/DRP has in view of the facts and circumstances of case, erred on facts and in law in making/upholding the addition of Rs. 2,73,58,354/- on account of alleged discrepancies in the Trading results. (b) That, without prejudice, the addition made is unjust, unlawful, arbitrary and also highly excessive. 12. Regarding addition of Rs. 5,77,24,556/- on account of alleged undisclosed Sale of Pulses. (a) That the AO/DRP has in view of the facts and circumstances of case, erred in facts and in law in making /upholding the addition of Rs. 5,77,24,556/- on account of alleged undisclosed Sale of Pulses. (b) That the AO/DRP has failed to appreciate that the shortage/milling loss in processing is within the normal ....
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....gal and without jurisdiction as Assessing Officer has not recorded any reason on the basis of which he reached the conclusion that it was necessary and expedient to refer the matter to the TPO for computation. (b) That, without prejudice, the reference made to the ld. TPO and the additions/adjustments made are illegal and bad in law as the reference had already been made earlier to the Ld. TPO and an order dated 01.03.2005 u/s 92CA(3) was passed by making adjustment of Rs. 34,22,320/- on account of difference in arm's length price on the international transactions entered between the assessee and its AEs. (c) That since no incriminating material was found during the course of search u/s 132 of the Income Tax Act, 1961 , hence the reference made to ld. TPO under section 92CA(1) of the Income Tax Act,1961 and the additions/adjustments made is illegal, bad-in-Iaw and without jurisdiction. (d) That the Ld. AO/Ld.TPO has erred in making additions by way of TP adjustment on change of opinion on the same set of facts which was earlier examined and accepted by the Learned TPO in some of the earlier assessment years forming part of the assessments made u....
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....ort of goods by the assessee to its AEs. (k) That in making transfer pricing adjustments on account of international transactions, the Ld. TPO has failed to give benefit of +/- 5%, as provided under the first Proviso to Section 92C(2) of the Act. (l) That, without prejudice, to the other grounds, the additions made on account of Transfer Pricing adjustment is highly excessive. 17. That the Interest u/s 234B has been wrongly and illegally charged. The assessee could not have anticipated the additions and as such there is no default in payment of Advance Tax. Moreover, the interest u/s 234B has been wrongly worked out and is highly excessive. 18. That, without prejudice, the credit for Rs. 27,00,000./- of cash seized during search and credit for Rs. 31,236 paid on 13.11.2009 have not been allowed against the tax already charged as claimed in the revised return. 19. That, without prejudice, the tax has been wrongly worked out and consequently, surcharge, cess and interest has also been wrongly worked out. The credit for taxes paid has not been correctly given. 20. That, without prejudice to each of the above ground, the AO/DRP has ....
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.... AR further submitted that the books of account of the assessee cannot be rejected on the ground that qualitative stock tally was not maintained. No mistake was pointed out in the books of account. No sales/purchase was found to be made out of books. The Assessing Officer has not pointed out any irregularity in the sales and purchases. The complete stock tally was maintained and the same is placed before the Assessing Officer. He further submitted that the yield was 61.90% for AY 2002-03, 61.61% for AY 2003-04, 64.67% for AY 2004-05, 65.11% for AY 2005-06, 68.88% for AY 2006-07, 64.94% for AY 2007-08 and 65.02% for AY 2008-09 and the same was as per industry norms for relevant year. The yield of husk, faak and bran was 38.10%. The by-products were also sold and sales were duly recorded and the same is evident from page 180 of the paper book. He further submitted that yield of 61.90% was within the industry norms. The circular issued by Punjab Mandi Board also states that milling yield at 61% is normal. The circular is placed at pages 174 to 177 of the paper book. Ld. AR further submitted that there is no change in the method of accounting. The same method was adopted in the earlier....
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....9 ITR 577/[2002] 125 Taxman 454, ITAT, Hyderabad Bench in the case of Vishal Infrastructure Ltd. v. Asstt. CIT [2007] 11 SOT 386 and ITAT, Amritsar Bench in the case of Shankar Rice Co. (supra). He further submitted that Assessing Officer instead of objectively pointing out any unjustified fall in GP, on grossly ad hoc approach, made uniform addition of 1% on the sale of rice for all the assessment years as GP addition to gross profit declared by the assessee also. For the Assessment Year 2001-02, the gross profit rate was declared @ 13.78% by the assessee and the same was accepted by the Assessing Officer and ITAT whereas GP rate for the AY 2002-03 is 15.78%, for AY 2003-04 is 15.30%, for AY 2004-05 is 15.34%, for AY 2005-06 is 15.34%, for AY 2006-07 is 16.78%, for AY 2007-08 is 21.65% and for AY 2008-09 is 21.65%. Thus, the rejection of books of account has been held on flimsy and unsubstantiated reasons. Although there are no sales pointed out by any document found during the search outside books of account, it cannot be a valid basis for making ad hoc addition of 1% of sale of rice. The trading results of the assessee for all the years under consideration are by and large bette....
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.... Had there been any quantitative tally, assessee has produced stock register but in the absence of day-to-day stock tally at various places of business by itself cannot be a conclusion to give that assessee is shine away from producing the day-to-day tally. In view of these facts, we see no justification in rejection of books of account. 9.2 The assessee has demonstrated that its yield of rice, bran and faak is as per the industry norm and the GP rate in all the years is favourably comparable. Under these circumstances, it cannot be held that the assessee's book results are unsatisfactory. Merely because a search is carried on it is not automatically meant that assessee is indulging in some nefarious activities. This is the burden of the revenue to prove in this behalf with material and cogent reasons. Rejection of audited books of account otherwise properly maintained cannot be recourse to by Assessing Officer in a casual and wishy vice manner. The ad hoc disallowance, rejection of books and taking support of this fact which we are not able to subscribe the ad hoc addition of 1% of sales is again without any basis whatsoever. Stock tally cannot lead to an ad hoc assumption ....
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....ng Officer without appreciating this crucial fact has added the entire difference as unexplained purchase. The ld. AR placed reliance on the decision of ITAT, Delhi Bench in the case of ITO v. Ahaar Consumer Product (P.) Ltd [2011] 10 taxmann.com 181 (Delhi) in favour of the assessee on this count. Ld. AR further submitted that a statement showing details of pulses imported, produced, sales and processing loss was already submitted before the Assessing Officer/DRP which is evident from page 181 of the paper book for the Assessment Year 2002-03 and page 129 of the paper book for the Assessment Year 2003-04. The statement showing details of the dispatch of processed pulses from various millers were also produced before the Assessing Officer/DRP. This fact is evident from page 182 to 185 of the paper book vol.I for Assessment Year 2002-03 and pages 130 to 233 of paper book vol.I for Assessment Year 2003-04. It is vehemently submitted that assessee's explanation is supported by the fact that no milling / processing charges were paid to the millers and there is no debit to profit & loss account in this regard. This is a residual content and retained by them in lieu of processing cha....
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.... pulses are re-exported after processing. These confirmations from miller go to the root of the controversy with regard to the shortage of pulses. One of the major reasons for making the addition by the Assessing Officer was not furnishing the names and addresses of these milling parties. In our considered view, the issue cannot be properly decided without admitting and verifying the veracity of these confirmations from millers located at Indore. We find these as necessary for proper and fair decision on this ground of appeal. Therefore, in the interest of justice and equity, we find it appropriate to admit the same and restore the issue to the Assessing Officer as the issue requires a re-look/reexamination at the level of the Assessing Officer. Accordingly, we restore this issue to the file of the Assessing Officer to be decided afresh after providing adequate opportunity of being heard to the assessee. 14. In the ground no.13 for Assessment Year 2002-03, the issue is against the addition of Rs. 7,06,99,833/- on account of undervaluation of closing stock. 15. This addition has been made only in the Assessment Year 2002-03. The Assessing Officer considered the stock of non-ba....
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....e of Basmati rice as closing stock, therefore, the addition was completely unjustified. He submitted that merely using the two different nomenclatures in the chart mentioned above, i.e. FCI and Non-Basmati cannot be the basis of treating the Non-Basmati rice as Basmati rice. He also submitted that ultimately it will have no revenue impact as enhancement of the closing stock of Assessment Year 2002-03 shall also enhance the opening stock of the next year, i.e. Assessment Year 2003-04. 16. On the other hand, the ld. DR submitted that the assessee has not furnished any stock statements or stock tallies to support their claims regarding the actual quantity of the closing stock of Basmati and non-Basmati rice. He submitted that no separate statements of the two types of rice showing the opening stock, the total purchases, total production, total sale etc. have been filed. He further submitted that the assessee has not furnished any evidence in support of his claim of the value of per quintal of both types of rice. In such circumstances, the assessee has failed to controvert the finding of the Assessing Officer, therefore, the issue deserves to be sustained. 17. We have heard both ....
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.... 19. While pleading on behalf of the assessee, ld. AR submitted that the Assessing Officer has not followed the direction of the DRP by not allowing the deduction u/s 80HHC in respect of sale of Replacement of Export Policy Licences in the light of the judgment of Hon'ble Supreme Court in the case of Topman Export - 67 DTR 185 (SC). Assessee pleads that is claim of 80HHC may be restored as per the law keeping in view of income assessed under the head business and profession. 20. We have heard both the sides on the issue. We have also gone through the direction of the DRP which is reproduced as under :- "We have considered the issue carefully. The arguments of the ld. Counsels that the process of cleaning and polishing of rice before it is exported does not amount to manufacture is to be upheld. In the case of Gem India Manufacturing, 249 ITR 307 (SC) the supreme court has held that the process of polishing of diamonds does not amount to manufacture. AO is accordingly directed to treat the profit on export of rice, even though it is exported after cleaning and polishing as profits from export of trading goods. The assessee's objection in this regard is upheld. As....
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....n the decisions of ITO v. Dr. Willmar Schwabe India (P.) Ltd. [2005] 3 SOT 71 (Delhi), Nature Bio Foods Ltd. v. ACIT in IT Appeal No.4522 (Delhi) 2012 and Dy. CIT v. Dhaanya Seeds (P.) Ltd. [2014] 64 SOT 15/42 taxmann.com 277 (Bang. - Trib.). It was also submitted that AO was not justified by invoking the provisions of section 195(1) of the Act as per the Double Taxation Avoidance Agreement between the two countries and such income is not taxable in India as M/s. Nashar Trading Company has no Permanent Establishment in India. All the expenses have been incurred outside India, hence, no tax was deducted. Further, the AO's reliance on the provisions of section 40(a)(i) to hold that the amount of expenses incurred for advertisement is not allowable, is completely uncalled for as no TDS was required to be deducted from this payment. 23. We have heard both the sides on the issue. M/s. Nashar Trading Company is a distributor of the assessee and has been reimbursed 50% of the advertisement of the promotional expenses incurred as per the mutual understanding of the assessee. In our considered view, the revenue has failed to bring on record anything which can show that this expenditu....
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....these purchases as non-genuine is due to not filing anything like affidavits or confirmations. Although in certain cases copy of ITR, tax audit report, copy of balance sheet of these concerns were submitted. Similarly, in the case of Paras Enterprises / Trading Co. and M/s. Jai Hanuman Trading Co., the assessee has not filed any account in respect of paddi received for milling charges after deduction of TDS. The relevant portion of DRP direction read as under :- "E-1. On this issue the DRP-I has given the following findings:- "it is seen that the AO has issued summons to the parties. Since there was no response to the summons from these parties, he deputed the inspector for physical verification and the inspector reported that some of the parties did not exist at the given addresses and some other parties were not maintaining books of account. Thereafter, on perusal of the various details filed by the assessee, the AO found that the assessee has not filed confirmations from these parties. The AO accordingly asked the assessee to file the copies of the accounts of these parties, the bank statement, the confirmations, return of income and balance Sheet of these parties. The AO ....
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....nt has been made by cheque. However, in respect of M/s Shanti Trading, M/s Pooja Enterprises, M/s Vikas Enterprises, M/s Tirth Ram Rajesh Kumar and M/s Shivam Traders, the assessee has failed to file even before us anything like, affidavit or confirmation to establish the genuineness of the existence of these parties and genuineness of the purchases from these parties. Even though, in respect of some of these parties, assessee has filed information like, copy of the ITR, tax audit report, copy of the balance sheet of the party. But these items just by themselves do not establish the genuineness of the purchases as there is nothing in these documents to show sales made to the assessee. Unless, the assessee files affidavit or confirmation from these parties for having made sales to the assessee the genuineness of the purchases from these parties cannot be regarded to have been established. The assessee has thus, failed to establish the genuineness of the following purchases. In respect of M/s Paras Enterprises and M/s Jai Hanuman, the assessee has not filed any account even in respect of paddy received for milling charges received after deduction of TDS and details of pa....
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.... has been wrongly treated as bogus purchases by the AO. The assessee has also shown purchases from M/s. Shanti Trading Co. in assessment years 2004-05 and 2007-08. Ld. AR relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 216 Taxman 171 (Mag.)/35 taxmann.com 384 (Bom.) and the decision of ITAT, Chandigarh Bench (Third Member) in the case of J.R. Solvent Industries (P.) Ltd. v. Asstt. CIT [1999] 68 ITD 65. 28.1 For the Assessment Year 2005-06, the addition was made of Rs. 2,16,13,689/- on account of purchases from Paras Enterprises and Rs. 8,98,940/- from M/s. Shivam Impex for the reason that summons u/s 131 were issued to verify the parties but none of them responded. The Inspector deputed to serve the summons but did not find the parties at the given address and the confirmations, copy of the bank account, copy of bank statement, return of income and balance sheet of these parties were not submitted. While pleading on behalf of the assessee ld. AR submitted that the Assessing Officer has made a mistake by taking the balance of Rs. 2,16,13,389/- in the name of M/s. Paras Enterprises/Trading Co. while it was a b....
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....ith regard to M/s. Paras Enterprises, the assessee has submitted that the details of truck numbers, bags, weight, approximate value of paddy received were given. The details of rice sent back after milling are also submitted. The residual in the shape of husk, bran, etc. was kept by the assessee and it cannot be said that seized documents were unexplained. Therefore, no addition is called for. The copy of the account shows that all the transactions have been done through account payee cheques and necessary TDS entries are also reflected in the account. In view of these facts, M/s. Paras Enterprises/Trading Co. is a genuine party. 28.3 For the Assessment Year 2007-08, the addition of Rs. 6,77,23,259/- was made on account of unexplained purchases. Out of this, Rs. 4,05,20,250/- were from M/s. Shanti Trading Co. for which we have already noted the pleadings of the assessee in earlier part of this paragraph and Rs. 2,72,02,739/- were from M/s. Pooja Enterprises. The reason for addition was same as in earlier years. While pleading on behalf of the assessee, the ld. AR submitted that assessee has submitted PAN, copy of balance sheet and tax audit report of M/s. Pooja Enterprises for A....
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....Ltd. The bank certificate dated 20.04.2012 was filed before DRP as additional evidence which has not been considered. In view of these facts, the genuineness of purchases cannot be doubted. 29. On the other hand, ld. DR submitted that the DRP has considered the submissions of the assessee in respect of various concerns and the assessee has not submitted affidavits or confirmations to establish the genuineness and existence of M/s. Shanti Trading Co. for the genuineness of the purchases and also details of the other concerns. Unless the assessee files affidavits or confirmations from these parties to the sales, the genuineness of these parties cannot be regarded to have been established. Therefore, the addition may deserve to be sustained. 30. After hearing both the sides in detail in respect of these purchases, we find that both the sides have agreed that this issue may go back to AO to decide de novo where the assessee shall have the opportunity to file all the relevant documents whichever it wants to rely upon to prove the genuineness of the purchases. Therefore, this issue is restored to the file of AO. 31. Ground No.15 in Assessment Year 2003-04 is with regard to the e....
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....tage of non-Basmati rice stock should be valued corrected. 35. After hearing both the sides, we find that the assessee has tried to explain the discrepancy by way of showing non-Basmati rice. Besides, the facts about availability of non-Basmati rice in the stock needs verification at the level of Assessing Officer. Therefore, it will be in the interest of justice that this issue is restored back to the file of the AO. We restore the issue to the file of Assessing Officer. 36. In the ground no.15 for Assessment Year 2006-07, the issue involved is regarding addition on account of trade mark expenses. The assessee has incurred expenditure on trade mark registration which has been treated as capital in nature as it has led to the creation of an intangible asset. The DRP has upheld the action of the AO and direct to allow depreciation u/s 32 of the Act at the rate applicable for intangible asset and the AO has allowed the depreciation. The total expenditure was Rs. 17,28,847/-. After allowing the depreciation, the addition was made of Rs. 12,96,363/-. While pleading on behalf of the assessee, ld. AR submitted that most of the expenses are petty in nature and incurred on the renewa....
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....s are vague and do not bear the full address of the persons, viz., Mr. Gopal Manchanda and Mr. Anil Sapra. 39. After hearing both the sides on the issue, we find that the affidavits of Shri Gopal Manchanda and Shri Anil Sapra were filed as additional evidences during the proceedings before the DRP. These affidavits were also containing the PAN of Shri Gopal Manchanda and other details. After hearing both the sides, we find that this issue requires a relook at the level of AO as the correct facts are needed to be brought on record to decide the issue. Therefore, we restore this issue to the file of the AO for deciding de novo. 40. In the ground no.17 for Assessment Year 2006-07 and ground no.14 for Assessment Year 2007-08, the issue involved is against the addition of Rs. 10,49,477/-and Rs. 38,49,012/- respectively on account of unaccounted interest payment in cash. This addition was made on the basis of seized material. The assessee claimed that the paper does not relate to the assessee but it relates to M/s. Gopal Builders and M/s. Neelu Building Material. Assessee has submitted their affidavits in support of this claim. Assessee also claims alternatively that when incoming ....
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....ook and directions of the DRP are in para 25.4. 45. While pleading on behalf of the assessee ld. AR submitted that there is no specific reasons which have been put forward to substantiate and justify the addition and no specific flaws or defects have been found in the documents furnished by the assessee. This addition has been made by making a sweeping remark that documents furnished by the assessee are nothing but self serving documents which cannot be relied. The Assessing Officer has never pointed out why these documents cannot be accepted and relied upon. The observation of the Assessing Officer that no address has been produced is also not correct. He also submitted that entries noted at page 120 are noted by accountant/cashier, Mr. Anil Sapra and part of these entries are of assessee company and part of other persons on which cash was handled by Mr. Anil Sapra. 46. We have heard both the sides on this issue. We have also gone through the submissions made by the assessee. Since we have already restored the issue related to the unaccounted cash receipts and unaccounted cash payments based on the seized material to the file of the Assessing Officer, therefore, on these add....
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....nd processed goods since 32 years. The assessee company also deals in other agro commodities which are imported form abroad for domestic consumption. The activity of the assessee also involved import of machinery for rice processing and food processing units. In this process of business, the assessee is constantly exposed to forex exchange rate risk as the exchange rate keeps changing on account of international developments on daily basis. Being a going concern, the assessee company made endeavour to protect its business from non-core risk as per the guidelines issued by RBI. Ld. AR has placed reliance on the Master Circular issued by the RBI bearing No.6/2007-08 dated 02.07.2007 which permits booking of these hedging contracts including hedging through cross currency hedging contracts. The assessee is following these guidelines of RBI and entered into contracts only with banks recognized by the RBI as authorized dealers. All these authorized dealers through verification of documentary evidence and on being satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account transaction permits the assessee booking of suc....
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....kes the obligation as seller of the option and such arrangements were allowed by RBI. The ld. AR has further given the written submissions which are reproduced as under :- '6. The insistence of Special Auditors as well as the Ld. AO to link each hedging transactions value-wise, currency-wise with invoices shows deficiency of their knowledge on the subject. It is submitted that the RBI in case of large exporters and star trading houses permits cross currency options, and maintenance of running export packing credit account to facilitate their large export on an ongoing basis. On the same lines the assessee carries a sizable foreign exchange risk and took a commercial view of entering into risk hedging transactions based on orders in hand, orders in pipeline, past experience of exports during particulars months. The Special Auditors were neither having a proper perspective of our business requirement nor a proper understanding of the intention of the RBI's Circular/directive. It is submitted that the Special Auditors as well as the ld. AO were guided by their own notions and narrow definitions devoid of practical experience of trade, foreign exchange business and risk miti....
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.... P. Ltd. (2003) 261 ITR 256 (Bom), wherein following the judgement of Hon'ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull (1981) 129 ITR 169(Cal), was relied upon. 10.1 It is evident from the aforesaid that, where an exporter of cotton, not a dealer in foreign exchange, entered into a forward contract with banks in foreign exchange to meet possible fluctuations in foreign exchange in respect of export order and suffers loss, such loss is not to be treated as speculative loss being excepted as a hedging transaction. Further it has been held that when the, assessee was not a dealer in foreign exchange he is entitled to claim the loss as a business loss. It is submitted that even in the present case, the assessee company had entered into forward contracts with the banks in foreign exchange to meet possible fluctuations in foreign exchange, as such the loss suffered is a business loss. Moreover, the ld. AO has further failed to appreciate that when the assessee is not a dealer in foreign exchange and when the transaction is purely incidental to the assessee's regular course of business the loss would be allowable as a business loss. Reliance is also being ....
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....dity so as to attract the provisions of S. 43(5). (f) The Mumbai Bench of ITAT in the case of DCIT v. Intergold (I) Ltd., (124 TTJ 337) has held that profits from cancellation of forward exchange contracts are business profits and not speculative profits. (g) The Calcutta High Court in the case of CIT v. Soorajmull Nagarmull, (129 ITR 169) has held that where in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. 12. Without prejudice, it is submitted that the ld. AO has failed to appreciate that foreign exchange cannot be claimed as a commodity in which the assessee was dealing and therefore, even for this reason the transaction did not come within the substantial part of section 43(5) itself. 12.1 It is evident that the definition of 'speculative transaction' u/s 43(5) that a 'speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the a....
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....a business expenditure, as such deduction is allowable for the actual crystallised loss on account of currency derivatives. 14.1 In the case of Ramachandar Shivnarayan v. CIT, (111 ITR 263), the Supreme Court observed that: "there is no specific provision to be found in either of the two acts for allowing deduction of a trading loss ... but it has been uniformly laid down that a trading loss not being a capital loss has got to be taken into account while arriving at the true figures of the assessee's income in the commercial sense. The lists of permissible deductions in either acts is not exhaustive. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard, such a loss is considered to be a trading one and becomes deductible from the total income, although, in terms of neither the 1922 Act nor in the 1961 Act, there is a provision." 14.2 It is submitted that a loss will be allowable u/s.28 of the Act, if the following conditions are satis....
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....substantial part of section 43(5) itself. Without prejudice, it is submitted that the contracts were for hedging foreign exchange risk and for which no Recognized Exchange was operating in the market during the relevant period. And therefore, the reliance/ reference to Proviso (d) below Section 43(5) of the Act, is out of place and not applicable on the facts of the instant case (on hedged forex transaction done by the assessee company or on losses resulting from such transactions). 16. It is further submitted that before the Special Auditor as well as the ld. AO the assessee had submitted a certificate issued by eforexindia.com (P) limited (a leading consultancy firm in Foreign Exchange Treasury Solutions), which clearly states that the transactions in question were genuine trade transactions . It is submitted that the aforesaid consultancy firm, after going through the entire portfolio of hedging contracts entered by the assessee company with the Authorised Dealers Bank for the financial year 2007-08, concluded as follows: "As such, it can be concluded that the deals were done for hedging purposes only and no speculative angle can be ascertained" 17. It is further submit....
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....e assessee is not a member of a forward market or an exchange. - The Company failed to demonstrate that the transactions in question were hedging transactions as no details were furnished. - the details of forex forward contracts were not linked to the trade/export. - FCs on certain dates could have been of higher value than the export receivables. As such, the assessee did not demonstrate rupee-to-rupee and date-specific correlation between the FCs and the export invoices. - Apparently few Forward Contracts might have been cancelled before the maturity date, which was a characteristic of speculation activity or there were any alterations. [Assessee failed to give details] In view of the above, the following submissions are made: A. Forward Contracts are to be treated as commodity as held in 38 taxmann.com 338 (Mumbai-Trib.). Reliance on the decision of the Bombay High Court in the case of CIT v. Badridas Gauridu (P.) Ltd. [2004] 134 Taxman 376 (Bombay) and CIT v. Soorajmull Nagarmull [1981] 129 ITR 169 (Cal) in the case of London Star Diamond Company (I) P. Ltd v. DCIT [2013] 38 taxmann.com 338 (Mumbai-Trib.). Relevant extract of para 19 o....
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....p & on the other hand, a hedging transaction is a contract entered into to protect against possible price fluctuations in the commodity / goods traded by the assessee. ITAT has formulated seven tests to determine a hedging transaction as a non speculative transaction For the purpose of clause (a) of proviso to section 43(5) of the Act. The ITAT Mumbai noted that as the assessee was a dealer in diamonds, hence only forward contracts in diamonds could be treated as hedging contracts. Further, the forward contracts for foreign exchange were closed without actual delivery. Assessee was also unable to establish that booking and cancellation of forward contracts of foreign exchange were in respect of specified export or import. Hence, the loss on forward contract on cancellation and marked-to-market on outstanding contracts as on year end on hedging foreign exchange risk was held to be a speculative contract. B. Explanation to S. 37(1) inserted by the Finance Act 1998 with retrospective effect from 1-4-1962 reads as under: "Explanation - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is proh....
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....d in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. (vi) The forward foreign exchange contracts have all the trappings of stock-in-trade. (vii) In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd., the assessee's claim is allowable. (viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. This creates a situation where on one hand a Special Bench decision allows MTM losses, while on the other hand CBDT Instruction mandates disallowance. Apparently, the instruction from CBDT was not pointed out to the ITAT in this matter. Also, the question in the said case was whether MTM loss was a real loss or notional loss and the issue of speculation under 43(5) was not an issue before the ITAT. On this background, the benefit of this Special Bench order for claiming allowability of MTM losses despite the instruction to the contrary by the CBDT is not available especially due to the facts that the assessee failed to discharge its onus on giving real time data. Besides, the assessee in ....
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.... avail the facility of booking forward contracts which carry a particular ticket size of 1 million and above which may cover combination of many transactions. The Assessing officer has only visualized a case where person is a one time exporter/importer and has one export/ import order against which the forward contracts is entered. As against that, the assessee is having a running business of export and always has multiple export orders in hand on a given day. The Forward Contracts are entered by the bank on the basis of running account and past performance as permitted by the Reserve Bank of India. The export orders are always much more than the actual export sales in a particular year as on many occasions certain export orders do not translate into actual sale which can be for many factors. In fact it is accepted in the case of CIT v. London Star Diamond Company (I) Pvt. Ltd. v DCIT (2013) ITA No. 6169/ M / 2012 while holding such transactions to be not in the nature of speculation that no one to one correlation is required between Foreign Contracts and corresponding export invoices. 5. Even otherwise, it is wrong to say that Forward Contracts do not have correlation wit....
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....the transaction did not come within the substantial part of section 43(5) itself At paragraph 17, the Tribunal has held that it is not a case of settlement of a contract but it is cancellation of a contract, as is evident from the cancellation charges paid for non performance of contract and therefore the transaction cannot be said to be transaction for settlement of contract and hence section 43(5) is not attracted. At page 18 it was further held that the transaction entered into by the assessee is also covered by the Board circular No. 23D(XXXIX) [F.No. 412/(4)60/TPLl dated 12.09.1960 and gave a finding that at best this is a hedging loss. This decision is applicable in all force to the facts of the case. Even otherwise the judgment of the Hon'ble Bombay High Court in the case of CIT v Badridas Gauridu (P) Ltd. (supra) has held as follows: "Held, dismissing the appeal, that the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed.....
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....jmal Nagarmal (supra) it is held that Foreign Exchange is a commodity. Whereas Calcutta High Court in the said case was referring to another case of Fedrick Ville of UK court wherein the German Convertible Bonds were sent from Berlin to Copenhagen and then to USA were seized as goods or commodity of enemy origin under the Repairable Order in Council of March 11,1975. It was observed by the court that Bonds were goods within the meaning of that word of the order. The attention of the court was drawn to the following observations of the Hon'ble Calcutta High Court in the case of Surajmal Nagarmal (supra). The relevant paras are reproduced as under: Learned advocate for the revenue contended before us that foreign exchange is a commodity. He relied on the observations of the Probate Division of U.K. in the case of Frederik VIII, reported in Law Reports, 1917, at p. 43, where the German Government bonds, which had been sent from a German banking company in Berlin to a firm in Copenhagen to be forwarded by registered post to a bank in Chicago, were seized, as goods or commodities of enemy origin, under the Reprisals Order in Council of March 11, 1915, from the letter main of t....
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....xtent of the amount of profits and gains, if any in any other business consisting of speculative transactions. Therefore if the assessee carried on speculative transactions which are in the nature of the business of the assessee then such loss resulting from such speculative loss can be set off against the speculative gains but cannot be set off against other gains. In that context, Expln. 2 defines what is a speculative transaction. The said Expln. 2 is to the following effect: "Explanation 2.-A speculative transaction means a transaction in which a contract for purchase and sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual or transfer of the commodity or scrips: Provided that for the purposes of this section,- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer....
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....iness of the assessee and it was only incidental to the main business of Rice export. 13. The assessee was not a dealer of foreign exchange as such. Even the requirement of explanation (2) of Section 28 are not fulfilled in as much as it is not the case of the revenue that the said transactions are of such nature so as to constitute a business by itself. 14. It may also be submitted that it is not the first year that assessee has entered into foreign Contracts and even in earlier years, the assessee has earned profit from similar transactions which was declared as regular business income being incidental to main business and is also assessed as regular business income by the Assessing Officer. It is not assessed as Speculative Income in the earlier years for which assessment have already concluded u/s 153A by the same Assessing Officer. The detail of such years are as under: (Rupee in Crs) Financial Year Total Turnover Total Export Turnover Total Import Turnover Profit Before Tax Net Gain/ Loss on Hedging 2005-06 540.10 338.24 76.04 27.70 3.72 2006-07 589.23 370.00 26.29 ....
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....Dollar. The Assessing Officer without examining the details filed by the assessee and without making specific enquiries simply brushed aside the evidences and mentions that no specific underlying assets/liabilities/transactions which were hedged. In our considered view, all the relevant details were filed by the assessee before the Assessing Officer and Assessing Officer was not justified in the absence of any particular derivative transaction was for hedging for any assets/liabilities/expenditure/income/transaction. It is also a fact that assessee has made profit on similar hedging transactions in the Assessment Year 2006-07 and 2007-08 of Rs. 3.72 crores and Rs. 1.34 crores respectively and the same have been offered as business profit in the respective year. Considering all these factual aspects and also the case laws relied upon, we find that the revenue was not justified in not allowing the loss incurred by the assessee on the hedging transactions and holding the same as speculative loss. This ground of assessee's appeal stands allowed. 55. The issue involved in ground no.16 of Assessment Year 2008-09 is on account of restatement of foreign currency loans to subsidiarie....
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....uditor on which the Assessing Officer has placed the reliance pertains to is reflected in the chart reproduced in Para 6.5 at page no.234 of paper book which shows that there is a difference/discrepancy of excess stock of 30332.06 qtls. in respect of Murthal Unit. Further, in respect of Alipur Godown, there is difference/discrepancy of 38332.070 qtls. in stock physically found at the time of search is less than stock as per the stock register. The Assessing Officer worked out excess stock of 30332.06 in Murthal and a shortage of 38332.70 qtls. in Alipur and Assessing Officer held that stock of 38332.70 qtls. has been sold out of books at Alipur. 60. While pleading on behalf of the assessee, ld. AR submitted that the special auditor on which the Assessing Officer has placed the reliance itself shows that there was excess stock of 30332.06 qtls. at Murthal and a shortage of 38332.70 qtls. at Alipur. The model of assessee's business can explain the location wise shortage and excess stock. The Alipur formed a dormant station insofar as manufacturing activity is concerned. The Alipur was used purely for procurement or for sales only. All the rice purchased at Alipur was necessari....
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.... of stock taking at the time of search at Murthal and Alipur. Further it also requires details with regard to the assessee's claim that goods were transferred from one place to another place. Since there was excess stock calculated at one place and shortage at other place, a detailed factual aspect with regard to the transfer from one place to another place requires further examination. Keeping these facts in view, we find it appropriate to restore the issue to the file of the Assessing Officer to be decided de novo. 62. In the ground no.12 for Assessment Year 2008-09, the issue is with regard to addition of Rs. 4,40,70,691/- on account of unaccounted sales on which the gross profit rate has been worked out. This addition has been made for unaccounted sales by calculating gross profit rate. The survey team has calculated the stock at Alipur unit was short by 38332.70 qtls. and applied the rate of Rs. 5225.86 per qtl. And worked out the unaccounted sales of Rs. 20,03,20,173/- and by applying the gross profit rate @ 22%, this addition of Rs. 4,40,70,691/- has been made. The ld. AR for the assessee relied on the submissions made in the ground no.11 where the addition for unacco....
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.... Rice Rice Raiser Factory LLC for all the years in question is a joint venture. (ii) Indo European Foods Ltd. is a wholly owned subsidiary in all these years. (iii) Kohinoor Foods Inc. (formerly known as Satnam Overseas Inc.) for Assessment Years 2002-03 to 2004-05 was a joint venture and in Assessment Years 2005-06 to 2008-09, it became a wholly owned subsidiary. 63.2 The TP adjustments are assailed by the assessee on following counts:- (i) The TP reference made by Ld. AO in all these years suffered from jurisdictional error, inasmuch as, Ld. AO has not recorded any reasons in the draft assessment order based on which he arrived at a conclusion that it was necessary and expedient to refer the matter to Ld. TPO for computation of Arms Length Price (ALP) as required u/s 92CA (1). (ii) Before the search was carried out, the Transfer Pricing proceedings for Assessment Years 2002-03, 2003-04 and 2005-06 were already completed and TPO had furnished his reports by accepting the TP report submitted by assessee without any adjustments. It is not disputed that no incriminating material in relation to any TP issue was found during the course of se....
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....ich the Ld. AO could proceed with the re-computation of the ALP. A plain reading of the relevant provision reveals that the AO / TPO can determine the price only under the circumstances enumerated in clauses (a) to (d). Therefore, in light of the fact that the comparability analysis undertaken by the assessee was based on the well accepted transfer pricing principles, which was approved by TPO in Assessment Years 2002-03, 2003-04 and 2005-06 and in the absence of any incriminating information to the contrary, it was inappropriate on part of the Ld. TPO / Assessing Officer to recourse to fresh references, review the orders and in other years to reject the comparability analysis. (vi) Apropos Assessment Years 2002-03, 2003-04 & 2005-06, it is also pleaded that there is no provision in the Income-tax Act, 1961 which enables the Assessing Officer to make fresh references and TPO to review his earlier TP determinations. (vii) Apropos the merits of each adjustments, it is pleaded that the assessee desired to expand its overseas business. For this purpose, the above joint venture and wholly owned subsidiaries were created with the inter se relationship based on various a....
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.... the earlier years as a constant business policy, the assessee in one case charging 1% commission and in other case, nil. There is fundamental difference between a corporate guarantee and a bank guarantee. The bank guarantees provided by a bank is as merchant banking service. The loan raised by the AE is primarily secured by the lender bank/institutions, only for financial need, the collateral guarantee is given by the assessee to the creditor as an additional measure. Ld. Counsel for the assessee contends that the scope of definition of International Transaction under section 92B of the IT Act as has been amended retrospectively by Finance Act 2012 to include, "capital financing, including any type of long- term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business", is not applicable to the instant -A ' transaction and the same does not fall within the above definition. The above definition is intended to include guarantees provided for fees by Financial Services companies such as banks and does not cover shareholder cor....
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....rs Factory LLC) capital structure is effectively and economically controlled by the Assessee and its JV partner, any action taken by either of them to supplement or strengthen the creditworthiness are integral part of equity support is extended to such Joint ventures by its shareholders. (ii) The transactions arising on account of ownership linkage and which derives largely from the reputation of the group necessarily implies that there can be no guarantee acceptable to the banker which can be provided by the independent third party. The advantages arising to the shareholders itself from providing guarantee in lieu of equity support is also not capable of being evaluated satisfactorily. (iii) Assessee has obtained corporate guarantee from Oriental Bank of Commerce in relation to guarantee commission rates which are offered by the bank to the Assessee based on credit worthiness of the group. The guarantee commission rates offered by the bank vide letter dated 20 January 2012 are not standard rates offered by the bank (as per circular dated 12 March 2011). The bank has instead offered an upfront discount on 67 percent on the standard rates in the instant case consid....
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....on. ♦ The Chennai Tribunal in the case of Asstt. CIT v. W S Industries (India) Ltd. [2011] 128 ITD 98/[2010] 8 taxmann.com 280 held that providing corporate guarantee is very much incidental to the business of the parent company and the discharge of corporate guarantee provided on behalf of its subsidiary shall be allowable as business expenditure. E. Flaws in the benchmarking analysis adopted by the Ld. TPO (i) Erred in recognition of actual terms applicable between the Assessee and its AEs vis-a-vis alleged benchmarks used by the Ld. TPO (ii) Basic conditions prescribed under Rule 10B for application of CUP method not met/fulfilled while applying CUP method in the instant case. ♦ The application of CUP requires strict comparability and the ALP must be determined in the manner laid out in Rule 10B(i)(a) of the Rules. ♦ The UN Transfer Pricing guidelines also states in para 6.2.2.1. that when applying CUP method, an uncontrolled transaction is considered comparable to a controlled transaction, if- - There are no differences in the transactions being compared that would materially affect the....
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....ice provider. The transaction, as such would then be controlled transactions between two associated enterprises. Under the provisions of Section 92C of the Act and Rule 10B of Rules a controlled transaction between related parties cannot be used for the purpose of the determination of arm's length price. (vi) The Ld. TPO has relied upon the decision of the Canadian Tax court in the case of General Electric, Canada without realising that facts of this case are much different from the instant case of the assessee and the authority is a foreign court. Hence, this fundamental dissimilarity establishes that the Ld. TPO's reliance is misplaced. Even if the decision pronounced in the said case of General Electric, Canada, has any relevance, it must be appreciated that the Canadian Tax court confirmed the arm's length guarantee commission at 1 percent. Therefore, following the decision relied upon by the Ld. TPO no adjustment is warranted, since the Assessee has already charged guarantee commission of 1 percent from its AE in the next year i.e. FY 2002-03 (AY 2003-04) in relation to the corporate guarantee provided in AY 2002-03 as well. (vii) Even if for the ....
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....the bank may not charge any guarantee commission, depending upon its evaluation of relationship with a particular client. ♦ The universal application of rate of 3% for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given, risk undertaken, relationship between the bank and the client, economic and business interest are some of the major factors which has to be taken into consideration. ♦ Since the applicant has specifically stated that neither it has incurred any cost for providing the guarantee to the bank nor has undertaken any kind of risk, applying the rate of 3% on the guarantee commission based on external comparables and that to be on naked quote given in the website, is deleted in the present case. Accordingly such adjustment is not required. 63.4 Apropos the issue involving interest free advances given to overseas affiliates (Quantum of Adjustment - Rs. 26,09,989 for AY 2002-03 & Rs. 53,82,888 for AY 2003-04) is assailed by the assessee on following counts :- (i) The Assessee has given loan to its overseas affiliates with the objective ....
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....t is vehemently argued that the Ld. TPO has failed to comply with the basic conditions prescribed under Rule 10B(1)(a) read with Rule 10B(2) for application of CUP method, and thereby erred in using rates mentioned in information / documents obtained from CRISIL are as benchmarks for the purpose of determination of the arm's length price. (viii) Used domestic lending rates for benchmarking a cross border transaction entered between the Assessee and its overseas subsidiaries pertaining to advancing of loan in foreign currency. (ix) Reliance on the FIMMDA is misplaced since these are applicable only in cases where a corresponding rated bond of the issuer exists. (x) Use of information obtained by the TPO under section 133(6) cannot be relied upon by the Assessee since the objective authenticity and reliability of such information obtained cannot be verified / validated in light of circumstance applicable to the Assessee's instant case. Besides use of such information which is not available in the public domain tantamount to use of secret comparables by the Ld. TPO. (xi) It is further contended that the Ld. TPO has erred in using rate of int....
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....n annualised average rate of each product exported, and instead adopted differential rates (sometime monthly average, sometimes annual average etc.) which suited his convenience. ♦ In this regard, reliance is placed on Para 18 of the decision of the ITAT in the case of Tilda Riceland (P.) Ltd. v. Asstt. CIT [2014] 64 SOT 61/42 taxmann.com 400 (Delhi - Trib.) observing that though averaging of international transactions is not permitted under Rule 10B, however uncontrolled transactions can be averaged. ♦ In addition, the Ld. TPO has erred in not giving appropriate relief on account of differential factor having a bearing on the price charge to related parties and unrelated parties which warrant reasonable accurate adjustments to made. These include adjustment on account of - - Advertisement and marketing expenses - Differential packing - Higher risk assumed in relation to unrelated party exports etc. ♦ In the absence of any of the aforesaid adjustments which are warranted to eliminate qualitative differences in respect of exports made by the Assessee to its group entities and unrelated parties,....
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....case of interest free loans to AEs, the amount of notional interest shall be determined having regard to the arm's length price for taxability in the hands of the Indian entity. (a) Perot Systems TSI (India) Ltd. v. DCIT (2010-TIOL-51-ITAT-DEL). (b) VVF Ltd. v. DCIT (2010-TIOL-55-ITAT-MUM). (c) Also rely on Ascendas India Pvt Ltd (ITA No.1736/Md/2011 AY 2007-08 order dated 02/0112013 on principles of valuation of shares. The interest free funds given to the AEs as unsecured loans are certainly not at arm's length hence notional interest is bound to be determined in line with concept of ALP. Further, the rationale in case of Corporate Guarantees also is applicable in this situation." 65. We have heard the rival contentions and perused the material available on record. Apropos Assessment Years 2002-03 and 2003-04, the assessments were framed prior to the conducting of the search. During the course of these regular assessments, the TP working as submitted by the assessee was accepted by the TPO, thus the report remains accepted by the department on the issues of corporate guarantee, interest free loans and export of goods to AEs. It is not d....
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....nder :- (i) The assessee, has written pages to suggest that transfer pricing provisions is not an exact science and should be applied with care; (ii) The assessee, has acknowledged that its subsidiaries and joint ventures outside India, were in financial turmoil and were not able to raise funds from third party lenders, due to which it had to advance funds; (iii) The amounts advanced have been purely on the ground of commercial expediency. (iv) The usage of funds has been purely for the benefit of the parent company in furthering its business interest. (v) Relying on the Hon'ble Supreme Court's judgment in the case of SA Builders (supra), which dealt with allowability of interest expenditure incurred to advance interest free funds to group companies, the assessee has contended that given the economic conditions of its subsidiaries, it was in the commercial expediency to advance interest free funds and is commercially acceptable. (vi) Loans given by it was in the nature of financial support and loan was the only to remit funds as it provided flexibility to return the funds to assessee; (vii) Charging of high inte....
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....n the part of the TPO to have looked into such type of transactions and applying it as uncontrolled transactions. In our view, re-coursing straightaway to CRISIL, which deals in hardcore institutional finance transactions that too with clear commercial object of earning out of loans bereft on other considerations, is wholly inapplicable. There is no dispute on the issue that the real income theory has no application to a fictional working as provided by section 92 but this being part of the Income-tax Act, the valid consideration for properly assessing a transaction cannot be given a go by. Every fiction has limits to its application. In view thereof, we hold that the rate of 13.49% applied solely relying upon a third party opinion by applying on uncontrolled set of transaction is factually not correct and cannot be accepted. 68.2 In consideration of the contentions, case laws and foregoing observations, we are of the view that the correct comparable which can be applied in these facts and circumstances is of LIBRO rate which is internationally recognized. It is the most appropriate comparable for the relevant periods and being reasonable and scientific uncontrolled comparable t....
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....ed view, there is prevalence of various types of guarantee services in the commercial parlance, which carry different type of obligations, commitments and risk. In this case, the AO applied CUP method and first held that SBI rates an uncontrolled comparable transaction. The SBI replied as 2.25% to be the rate charged by the bank as its commercial activities while providing the bank guarantee, Ld. TPO went beyond the information called upon by him from SBI. Similar information from no other institution has been called and further mark up of 2% is added by TPO on reasons of his own that SBI may be setting off losses in giving the bank guarantees at 2.25%. In our consideration, the TPO's action, in first going to SBI and then further enhancing it, is based on surmises and conjectures. His adjustment has no basis or corroboration whatsoever from any authentic source. 69.2 Now coming to the issue, the assessee has pleaded that they have charged 1% rate from one AE and nil from other for providing such guarantee. The assessee has demonstrated that it has received offers of similar types of guarantees from Oriental Bank of Commerce @ 0.28%; the independent directors of AE have also....
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....wn basmati and other raw basmati varieties of rice, the price charged from its AEs are lower as compared to unrelated parties. All the relevant information about transactions with related parties and unrelated parties spread over during the year have been placed on record. The TPO, however, has not looked into the same and has failed to apply the annualized average rate of each exported product. Instead TPO has adopted differential rates and sometimes adopted monthly and yearly average which suited to any how apply the CUP method. It has been further pleaded that TPO has erred in not considering differential factors which have crucial bearing on price charged to related and unrelated parties. They depend upon various market conditions and require the following necessary adjustments :- (i) Adverse and marketing expenses; (ii) Differential banking (iii) Higher risk assumed to related and unrelated parties Thus, in the absence of application of applicable parameters, the CUP method adopted by TPO without citing cogent reasons and by unduly reviewing his own earlier TP reports is unjustified. The application of CUP method is to be based on strict comparabl....