TaxTMI 
TaxTMI 
2015 (12) TMI 1275
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.... TPO/Ld. Dispute Resolution Panel ("DRP") erred in making an addition of Rs. 57,46,70,024/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions under section 92 of the Act. Thus, in passing the order, the Ld. AO/Ld. TPO/Ld. DRP erred in: 3.1 Rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning. 3.2 Ignoring the comparable set proposed by Appellant as a result of fresh benchmarking study without assigning any reasoning. 3.3 Accepting companies which were functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile. 3.4 Including companies with high/supernormal margins in the comparable set adopted. 3.5. Including government held enterprises in the final comparable set adopted. 3.6 Not providing the benefit of economic adjustment on account of difference in working capital profile and thus not following the binding directions of Hon'ble DRP. 3.7 Denied the benefit of economic ....
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....rcumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act." Ground no. 3 to 3.5 of the assessee 3. Apropos these grounds, we have heard arguments of both the sides and carefully perused the relevant material placed on record. 4. Ld. Counsel of the assessee submitted that the ld. DRP and the AO erred in making an addition of Rs. 57,46,70,024 to the returned income of the assessee by recomputing ALP of the international transaction u/s 92 of the Act. Ld. Counsel further contended that the TPO was not justified in rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning. Ld. Counsel further contended that the TPO was not correct in ignoring the comparable set proposed by Appellant as a result of fresh benchmarking study without assigning any reasoning and accepting companies which were functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile. Ld. counsel vehemently contended that TPO/DRP and the AO were incorrect on facts and in la....
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....y transaction between the holding company and CEIL by ignoring various non-monetary benefits like free or level-basis of office facilities and secondments of employees by the holding company. Ld. Counsel contended that in the case of NTPCES, ld. DRP failed to note that this company does not even discuss RPT in its relevant annual report and it is pertinent to note that Schedule 9 of annual report clearly states that the amount payable to NTPC under the head current liability as on 31.3.2009 was Rs. 12.87 crores which alone is 18% of its operating revenue. 7. Ld. Counsel further pointed out that while evaluating comparables of these two impugned companies, the DRP has ignored the material difference in functional, geographical location of party and related party transaction (RPT) and the sole criteria adopted by the ld. DRP for treating NTPCES and CEIL as suitable comparables is only with Bechtel India Private Ltd. These two companies employ high-end technological and engineering resources and personnel. Ld. Counsel vehemently contended that the DRP erred in analyzing the function of these entities in terms of resources employed and failed to consider the wide variation in skills....
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....07 villages" Pan India Rural electrification under Rajiv Gandhi Grameen Vidyutikarna Yojana (RGGVY)-Achieved electrification of 4107villages execution of Turn Key Projects, providing third party inspection services. JV for retail distribution of power & Project Management Consultancy to Discoms and Power generating companies. Its functional profile is similar to Bechtel USA, holding company (Pg.1/DRP order). The contracts/projects 'entrusted' (Pg. 811/Vol.-IV). (Ref. Pg. 810-812, 835-838, 843/Vol.-IV.) Third Party Inspection (TPI), & Certification of equipment supplied by vendors and fabrication or installation work of Contractors of ONGC under a MOU between EIL & ONGC dt. 11/4/1985 on nomination basis. (Ref. Pg. 765-773, 803-805/Vol.-IV). Terms of MOU are not known. Also carries on similar TPI & Certification work independently for other PSUs. 4. Geographical Market International- 100% exporter of service. Domestic customers-Nil export Domestic customers-Insignificant export of service. 5. Forex Fluctuation Risk Yes Nil Insignificant Forex earning 3.75% of operating revenue. (Schd. 3(3) at pg. 803/Vol.-IV 6. RPT (DRP has failed to con....
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....see Bechtel India Pvt. Ltd., therefore, the AO/TPO may be directed to delete the same from the final set of comparables. Ld. Counsel also pointed out that after deletion of these impugned comparables, the international transaction of the assessee company would fall within 5% + - limit and there would be no requirement of making any transfer pricing adjustment to the returned income of the assessee. 9. Replying to the above, ld. DR contended that for AY 2009-10, the TPO/AO rightly held that impugned two companies are suitable comparable for benchmarking international transaction of the assessee company as functional profile of these companies are similar to the assessee company and mere pointing out some micro differences do not lose the title of comparability with the assessee company. Ld. AR also contended that the assessee company rendering engineering design, project support including design as per specification of foreign AE and impugned two companies NTPCES and CEIL are also rendering services in the similar field, therefore their suitability and comparability cannot be challenged on the frivolous and petty grounds. Adjudication of comparability of NTPCES with the assess....
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....rder, NTPCES also got joint venture assignment for retail distribution of power management consultancy to DISCOMs and power generating company. Ld. counsel also pointed out that NTPCES has all domestic customers specially government companies and department having no export services and the same cannot be held as comparable with the assessee company having 100% export of services outside India to its AE only. 13. Ld. Counsel also pointed out that the assessee company is having 100% RPT with its AE whereas RPT of NTPCES has not been reported in the annual report and this company has undertaken transaction mainly with the related parties such as government companies and government departments. Ld. Counsel also pointed out that as per annual report of the NTPCES during the financial period under consideration the amount of Rs. 12.87 crore was payable to the NTPC Ltd. and as per notes on account, all the employees of NTPCES are on settlement from the holding company and the NTPCES was utilising common services for its office at Noida provided without any charges by the holding company. Ld. Counsel vehemently contended that all the employees of NTPCES are on secondment from the holdi....
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....e business and functional profile of assessee company as tax payer, as noted by the DRP reads as under:- "Business Profile of Bechtel India as per taxpayer: * Bechtel Corporation, USA ('hereinafter referred to as Bechtel USA') set up a subsidiary company in India viz BIPL in April 1994 to render engineering support service in respect of engineering designs and drawings, BIPL executes engineering designs and drawings for various overseas group entities to support the overseas offices' turnkey project execution. Presently, BIPL undertakes engineering design and related services for its overseas group companies. ' * The development of the Arm's length Price ('ALP') by the taxpayer recognizes that BIPL performs contract engineering design services for its group companies. BIPL leverages on all the valuable intellectual Property ('IP') Right ('IPRs') [know-how, copyrights, etc] and other commercial processes, methodologies, etc. belonging to its AEs. Further, the Group is involved in complex operations of marketing, bidding for projects, providing turnkey solutions, project management and adhering to delivery timelines. BIPL....
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.... could not demolish this factum that the NTPCES executed turnkey contracts for 11th plan electricity supply projects awarded to it by the Government companies and electrical departments which also includes activity of distribution of power in Kerala. Undisputedly, the NTPCES was also provided work contract of rural electrification of 4107 villages, execution of turnkey projects and also provided third party inspection services. While the NTPCES is also rendering services for retail distribution of power and management consultancy to DISCOMs and other power generating companies, then its functionality with the asessee company cannot be held as comparable. We are also not in agreement with the conclusion of the DRP/TPO that the functional profile of NTPCES is similar to Bechtell Corporation USA i.e. holding company because we have to compare comparability of assesee company and not its holding company. Turning to the issue of geographical markets of both the companies, undisputedly assessee company having international transactions only with AE exporting 100% services to Bechtell Corporation USA whereas the NTPCES has nil exports having 100% domestic customers who are govern....
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....kings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables." 17. In view of proposition laid down by the ITAT, Mumbai, we observe that in that case, Engineers India Ltd. earned income from turnkey projects by successfully completing the project of IOCL and other public sector undertaking and the related party transaction were much more than the filter of 25%, therefore, the order for exclusion of Engineers India Ltd. was passed by the Tribunal. In the present case, the NTPCES was sheltered by its holding company NTPCES and government companies and departments awarded/entrusted various projects/contracts for rural electrification, distribution of power and project management consultancy, therefore, NTPCES loses the tag of comparability with the assessee Bechtell India. We also find it appropriate to mention that it cannot be ignored that the NTPCES is also enjoying settlement of all employees from the holding company NTPCS at cost and the benefits received from the holding company and related party transactions (RPT) are not monetised in the annual report....
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....dered after commissioning and installation of project. 19. Ld. Counsel also pointed out that CIEL provides aforesaid services to its domestic government companies and PSU having insignificant export of services whereas the assessee Bechtell India is exporter of 100% services to its AE. Ld. Counsel also pointed out that the assessee Bechtell India receives its remuneration/revenues from its AE in foreign exchange having forex fluctuation risk whereas the CIEL having insignificant forex earning of 3.75% of operating revenue as per Schedule III at page 803 of Volume IV of paper book of the assessee. Ld. Counsel vehemently contended that the related party transaction (RTP) are 100% in the case of asessee Bechtell India whereas the RTP of CIEL are only monetary transaction with the holding company having 19.60% transaction with ONGC, IOCL etc. which are not quantified. Ld. Counsel also pointed out that the jobs awarded by ONGC on nomination basis are being governed by the MOU or by holding company dated 11.4.1985. 20. Ld. Counsel also pointed out that contracts being awarded to CIEL for rural electrification schemes sanctioned to NTPCES are not awarded under open tender as per CVC....
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....on of the ld. TPO that the assessee Bechtel India is primarily engaged in rendering engineering support services by way of procuring and supplying design and drawings as per specifications of the AE by using the IPR supplied by the AE Bechtel Corporation USA. Ld. Counsel further pointed out that it is for this reason that the DRP upheld the two filters applied by the AO for the purpose of selecting comparables viz. (i) companies having revenue of less than Rs. 5 crore from rendering support services and; (ii) revenue from engineering support services is less than 75% of total operating revenue. Ld. Counsel also canvassed another submission that the ld. TPO/DRP have applied aforesaid two filters for selecting comparables because they accept that the primary business of the assessee company is of procuring design and drawings for AE enabling them to execute engineering products for clients outside India. Ld. Counsel contended that the ld. TPO/DRP have wrongly rejected the assessee's objection regarding inclusion of CIEL on altogether different basis i.e. the issue regarding functional non-comparables; is also not acceptable that in the cases of TNMM analysis one examines the comparab....
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....should be taken as more than 25% and not 15% as suggested on behalf of the assessee. 26. On the issue of RPT, it has been contended by the ld. Counsel of the assessee that 25% filter is not an appropriate filter for RPT and this test cannot be applied mechanically as if it has statutorily provided without exception. Ld. Counsel placing reliance on the decision of ITAT in the case of Motorola Solutions India (P) Ltd. in ITA No.5637/D/11 submitted that the RPT filter must not exceed 15%. Ld. Counsel vehemently contended that prerequisite of arriving at ALP with the transaction of tested party should be benchmarked with the uncontrolled transaction under Rule 10B(1)(e)(ii) of the Rules. Finally, ld. counsel submitted that the filter should be restricted to 15% of the total revenue. On careful consideration of above submissions, we are of the view that the ITAT Delhi in the case of Nokia India (P) Ltd. (supra) held that in principle if any company though functionally comparable but is more than specific percentage of RTP, then the same should be ignored by treating as a controlled transaction. The Tribunal in this order further held that the percentage of RPT to make the company as ....
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....dia was a distributor during the year considered in the order. On these facts, the Hon'ble Tribunal held that this case is distinguishable from the decision of the Special Bench in L.G. Electronics case ("Special Bench") as the fact under consideration in BMW India is the remuneration model of a distributor and not that of a licensed manufacturer. The relevant text of the decision has been provided hereunder: (Para 6.20, page 50 of BMW India order): Quote On examination of contemporary Guidelines/jurisprudence on the subject, we are of the view that a distributor is rewarded by the entity for whom the distributor works and the rewards are guaranteed upto an extent and the risk component vis-a-vis a manufacturer is necessarily very less. The rewards can be and generally are based on pricing adjustments and can also be compensated over and above that if greater services are rendered and pricing adjustments have not covered the cost of routine services rendered. Generally speaking the remuneration model for a distributor is reward-based and rewards are based on the quantity of sales. Unquote The second point pronounced by the Hon'ble Tribunal was that during ....
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.... The Hon'ble Tribunal further held that (Para 6.26, page 55 of BMW India order): Quote In support of the remuneration model of the assessee who is a distributor rewarded by way of price adjustments to ensure profitability upto mutually accepted terms is a well- recognized and well-accepted method for compensating a distributor. Unquote Further, on the issue of the mark up the Hon'ble Tribunal in the BMW India order held as under (Para 6.28, page 58 of BMW India order): Quote We hold that in the facts of the present case there was no occasion for the AE to further compensate the assessee for the services rendered towards building the brand of the AE as the same already stood factored in the pricing adjustment of the contract goods. As such the occasion to consider the applicability of mark-up does not arise. Unquote The Hon'ble Tribunal, in para no. 6.27 of the BMW India order has also mentioned that the Special Bench has accepted that there are diverse nature of facts, business models and peculiar terms and conditions of different assesses and there cannot be any straight jacket formula. Applicability to MSIPL As provided in the detailed hearings and s....
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....unal has held that the department cannot insist that pricing adjustment cannot be accepted as mode of compensation. Herein, it may be reiterated, that MSIPL has already received the said pricing adjustment through credit notes as a cost credit! purchase price adjustment from its AEs. This has been mentioned in para no 18 of page 11 of the written submission filed with Your Honours on May 20, 2013 and in para 8(1) of page 134 of the written submission filed with Your Honours on May 20, 2013." 15.1 Thus, the main contention of assessee is that remuneration model in case of Distributor towards AMP Expenses is different from the compensation model in case of License Manufacturer. Therefore, before considering the application of BMW's case to assessee's case, it is necessary that the business profile of assessee's case viz-a-viz BMW's case with reference to LG's Spl. Bench case is to be considered. Admittedly, the decision in the LG's case has been rendered in regard to AMP Expenses and for quantification of AMP Expenses also detailed guidelines have been laid down in the case of LG. 15.2 In case of LG Electronics brief facts were as under: "The factual ....
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.... of fixed assets 175,346,819 CUP 5. Purchase of software 78,880,000 CUP 6. Receipt of technical support service 29,449,506 CUP 7. Receipt of IT support services 2,739,917 CUP 8. Market survey expenses 11,711,690 CUP 9. Reimbursement of personal cost 17,252,074 CUP 10. Reimbursement of expenses 12,270,724 CUP 11. Interest of loan 12,9773,291 CUP 2.5 Referring to the Transfer Pricing Study of the assessee, the TPO observed that the assessee described its activities as that of a distributor. The TPO referred to the Importation Agreement between the parent company BMW AG and the assessee and observed that the same had been entered into w.e.f. 01.01.2006 and it stated that the assessee had the following duties in regard to marketing and promotion of the products of the parent company: "2.2. Responsibility in the Contract Territory BMW India represents the interest of BMW AG in the Contract Territory. It is responsible for the sale promotion and the full utilization of the market potential for the Contract Goods in the Contract Territory. It is furthe....
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.... offshore Oil & Gas Process & Well platforms, Petro-chemical Refineries, Submarine and Cross country Pipelines etc. CEIL provides services designed to suit project requirements throughout the life span of a plant / facility from concept to commissioning, revamping and health check. It promotes Safety, Quality and Reliability throughout the design and operating life of all types of equipment, structures, pressure vessels, pipelines and rotating machinery. The services cover all types of capital goods and equipment during manufacture and erection stages for oil & gas and general engineering sectors, encompassing; ~ Review of Detailed Engineering ~ Independent Analysis and Review of Designs/Drawings ~Conformance of Materials & Equipments to National/International Codes - ~ Review and Approval of Inspection Test Plans ~Review of Installation, Pre-commissioning and Commissioning Procedures ~ Third Party Inspection Services / Pre-shipment Inspection ~ Supervision of Site Construction for cross country water / gas pipelines ~ PMC Services for Infra structure projects of Municipalities ~ HAZOP Studies / Quanti....
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....India which is 100% exporter of services to its AE Bechtel Corporation, USA. 30. We may point out that functions of a company should be determined having regard to its data mentioned in the financial results filed along with return of income and annual report which is a primary resource and general information in the annual report is more accurate and this fact has not been controverted by the ld. CIT DR. From the functional profile of assessee Bechtel India and functional profile of CIEL as reproduced hereinabove, it is amply clear that the CIEL carries on business of certification and third party inspection of equipments provided by a contractor and obviously certification and TPI functions are dissimilar form the business of rendering engineering support services including related design and drawing as per specifications of foreign AE and by using intangibles/IPR of parent company. 31. Ld. DR could not demolish this factum that the certification/TPI involves testing/assessing and auditing of the work done by the high-end technocrats which conforms to specifications prescribed in the contract; meets quality standard of work and material; meets safety standards; meets enviro....
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....y disallowed. Ld. Counsel of the assessee further pointed out that the AO erred in holding that the Mark to Market losses in respect of re-measuring the foreign exchange forward contract as on balance sheet date are notional and contingent in nature which are not allowable. Ld. Counsel vehemently pointed out that the AO further erred in placing reliance on Instruction No. 3/2010 dated 23rd March 2010 issued with respect of assessees trading in forex derivatives and these instructions were issued after completion of financial period under consideration, thus, the same was not applicable to the assessee and further said instruction is ultra vires to the scope of section 119 of the Act. 34. Ld. Counsel also contended that the AO erred in holding that Mark to Market losses in respect of re-measuring the foreign exchange forward contract as on balance sheet date is not allowable as the forward contracts have not been taken for the purpose of business on raising of export invoice but taken without due exposure. Ld. counsel has further drawn our attention towards order of ITAT in assessee's own case for AY 2008-09 reported as Bechtel India Pvt. India Ltd vs ACIT(2013) 33 Taxman.com 213....
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..... Value of Unexpired FCs as on 31.3.2009 Value of unexpired FCs as on 31.3.2008 119.50 96.00 f. Invoices raised by 6.8.2008 (pg. 362/P.B. Vol.-II) 58.09 g. All 9 contracts were ultimately settled through delivery of contracted Rs. 119.50 crores worth of U.S. dollars. Ref : a) Pg. 61-66 of P.B. Vol.-I b) Pg. 355 of P.B. Vol.II c) Pgs. 751-753 of P.B. Vol. IV d) Draft assessment order for A.Y. 2010-11 Pg. 754/PB Vol.-4. e) Assessment order u/s 143(3)/144C dated 30.1.2015 for A.Y. 2010-11 (para 6 at Annexure 1) 4. Ld. DRP : i) Ignores accounting policy followed by assesee for Pg. 462-476 & 450- foreign exchange (forward) transactions. 51/P.B.Vol.-II, AS 11 & AS 30 read with AS 1. ii) The DRP ignores the judgment of Hon'b1e Delhi High Court in Virtual Soft Systems Ltd. (341 ITR 593) brought to its notice. It has been held therein that:- "10 .... the fact that the opinion of the Institute of Chartered Accountants of India was expressed in a Guidance Note which had not attained a mandatory status, would not provide a basis to the Assess....
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.... effect of the orders is at (Pg. 753/Vol.- IV Annexure 2B) 6. Findings of the Hon'ble Tribunal in A.Y. 2008-09:- i) Forex fluctuation loss on unexpired FCs booked on 31.3.2008 is covered by the Hon'ble Supreme Court decision in the case of Woodward Governer (312 ITR 254) ii) The assessee follow mercantile system and the loss is booked on a scientific basis in the ordinary course of business. iii) The loss has been incurred for hedging of foreign currency fluctuation involved in export sales; which is a business decision to safeguard its interest. iv) This loss is not notional and it is business loss. It has to be allowed following the Hon'ble Supreme Court in Woodward Governer case. CBDT Instruction no. 3 duly noted by Tribunal (Pg. 365/Vol.- II) Transactions not speculative u/s 43(5):- 7. Alternatively; the DRP, after examining all the invoices raised by the assessee on AEs, holds the FCs' to be speculative transactions as It found that the aggregate amount of 'invoices raised' did not cover the exposure as per the FCs booked by the assessee with Bank of America on 6th August 2008. Acco....
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....actions clearly do not fall within the meaning of the term 'speculative transaction' as defined in section 43(5) of the Act. It may be noted that for the purpose of section 43(5), it is not necessary, or even relevant, that the forward contract is settled within the accounting year. What is relevant is that it is ultimately settled through delivery of the commodity contracted for. Further, as held by the Apex Court, if the transaction satisfies the condition of 'actual delivery' of the contracted commodity, the transaction cannot be held to be speculative. (Ref. Devenport and Co. P. Ltd. Vs. CIT (1975) 100 ITR 715 (SC) at Pg. 759/vol.-IV). Proviso to Sec. 43(5) not applicable:- 11. Since the main section 43(5) of the Act is not applicable to the facts of the case, the Ld. ORP erred in law in invoking. the proviso to that section. The ORP's action of invoking the proviso to Sec. 43(5) is manifestly erroneous. It is settled law that- if a contract is ultimately settled by way of actual delivery (as opposed to constructive delivery) of the underlying commodity, it is not speculative. (Ref. Davenport & Co. P. Ltd. Vs. CIT 100 ITR 715, SC). Also see....
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....376 (Bombay) submitted that this aspect/issue needs to be examined in details so as to consider the nature of such losses to adjudicate the allowability and in that case the matter was set aside by the Tribunal on this issue as the assessee had not furnished requisite details to the AO. 36. Ld. CIT DR further pointed out that in the case of DCIT vs Bank of Bahrain and Kuwait in ITA No. 4404 & 1883/Mum/2004 the Special Bench of ITAT Mumbai while holding that mark to market losses in respect of forward foreign exchange contracts debited to profit and loss account is allowable and at the same time, CBDT Instruction No. 3/2010 mandates that instruction from CBDT were either not pointed out to the ITAT or was subsequent to this order. Ld. CIT DR also vehemently contended that the question in the said case was whether mark to market loss was a real loss or a notional loss and the issue of speculation u/s 43(5) was not before the Tribunal and hence benefit of the Special Bench order for claiming allowability cannot be extended to the assessee. Ld. CIT DR also pointed out that the special bench order was passed in the case of assessee bank and assessee of the present case is an engineer....
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....bove. The relevant written submissions of the ld. CIT DR read as under: - "Synopsis of DR submissions Date of submission: 09/0712014 Name of Assessee: Bechtel India P Limited AY: 2009-10 ITA No.: 882/D/2014 May the Hon'ble 'I' Bench be pleased to consider: Note on Forex Hedging Losses: The company's case does not satisfy the test of transactions that have been excluded under the extant provisions as deemed speculative transactions as: - it had not clearly demonstrated that the hedging transactions were with respect to raw materials or merchandise: - the 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 Contrac....
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....A) disallowed the loss and treated the loss as 'speculation loss', relying on an instruction and circular issued by the Central Board of Direct Taxes (CBDT) regarding this matter (Instruction No.] 3 of 2010dated 23 March 2010 and Circular No.23 of 1960 dated 12 September 1960). In this case, ITAT Mumbai has drawn a distinction between hedging transaction and speculative transaction, observing that 'speculative transaction' is a contract for purchase or sale of any commodity, stocks or shares that is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrip & 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. ITA T 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 actua....
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....A consistent method of accounting followed by the assessee cannot be disregarded only on the ground that a better method could be adopted. (iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31. (iv) A liability is said to have crystallised when a pending obligation on thebalance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing. (v) As per AS-II, when the transaction is not settled 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 ha....
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....sentative (Ld. DR) in respect of the 'Mark to Market' loss of Rs. 21.80 crores as on 31.03.2009 on the foreign exchange forward contracts (FCs) It is humbly submitted that this Rejoinder may kindly be read along with the Corporate Tax Submission dated 17.06.2015 submitted before your Honours Rejoinder: l. The Ld. CIT (DR) has emphasized that the assessee fails to satisfy any of the clauses of the proviso to section 43(5) of the Act. Therefore, marked to market losses on FCs are not allowable, being speculation losses. This contention is misconceived. The Ld. CIT (DR) merely reiterates the same view as expressed by the Ld. DRP. Both the Ld. DRP &CIT(DR) have ignored the main provision of section 43(5) . They have in the first place, failed to show as to how the impugned case is covered by the definition of 'speculative transaction' as defined in section 43(5) of the Act. All the contentions of the Ld. CIT(DR) have already been met in our submission dated 17.06.2015. The relevant provisions of section 43(5) which defines the term "speculative transaction" reads as under: .. (5) "speculative transaction" meansa tran....
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....-4-Ref. pgs., 728-733 of PE Vol.-IV clearly provide that where the amount is not ascertainable the forward contract may be taken on the basis reasonable estimate expected export receipts. The said Schedule states that a forward forex contract can be booked by an authorized dealer on the basis of reasonable estimate after verifying the documentary evidence. The bank after satisfying itself in terms of the FE MA regulations has issued the FCs. The facts are not in dispute at all. The matter has already been discussed at Point No. 7 of our submission dated 17.06.2015 before, your Honours. Thus, there is no requirement for demonstrating rupee-wise and date-specific correlation of export receivables for being not considered as a speculative, transaction. VI. It is an undisputed fact that all FCs were ultimately settled by delivery of contracted US dollars. The Ld. DRP has verified all the Foreign Inward Remittance Certificates (FIRC) for receipt of US dollars against respective FC and it is not disputed that all the FCs were ultimately settled through delivery of contracted amount of US dollars (Para 3.7.1 of DRP order at Pg 65 of PB Vol.1). Since, all FCs are settled by actual....
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....ly speculative and amounts to a wagering contract, it was settled by actual delivery, for the purpose of section 43(5), it is not a speculative transaction. Thus the section dispenses with all other formalities except that there must be actual delivery or transfer of the commodity when the contract is settled. [Emphasis supplied] vii. It has been clearly demonstrated beyond doubt that the FCs were taken for hedging against foreign exchange fluctuations in the normal course of export business as has already been held in favor of the assessee on similar facts in the earlier year i.e. AY 2008-09 by the Hon'ble Delhi IT AT (Pg.365 of the PB Vol. II). 2. It is humbly submitted that the reliance placed by the Ld. CIT(DR) on the decision in the case of BadridasGauridu (P) Ltd. v. CIT 134 Taxman 376 (Bombay), CIT v. Sooraj Mull Nagarmull 129 ITR 169 (Cal.), London Star Diamond Co. Vs. DCIT 38 Taxmann.com 338 (Mum. Trib) and S.Vinodkumar Diamonds Pvt. Ltd. vs. Addt. CIT 35 taxmann.com 337 (Mumbai IT AT), is wholly misplaced as these judgments are in context of cancellation of forward contracts and consequential settlement of contract through payment of difference betwe....
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....ever, how that would impact the instant transaction in FCs by the assessee is not stated. The instant FC transaction is entered into in terms of RBI Regulations (supra). Thus, this observations of the Ld. CIT(DR) towards Committee report losing sight of the applicable RBI regulations is wholly irrelevant. 6. In view of the above, it is submitted that the MTM loss for AY 2009-10 is allowable to the assessee based on the decision of the Hon'ble ITAT in assessee's own case for AY 2008-09 as there is no change in the facts and circumstances of the case. Further, to the extent of actual loss in the subsequent year has been allowed on cash basis by the Ld. AO/DRP in the Assessment Year 2010-11, which has been accepted by the Department. Thus, the whole dispute is regarding timing of allowance. Dated: 26.06.2015" 41. At the very outset, we observe that undisputedly, the assessee company is exclusively exporting engineering design services to its non-resident AE for which it receives consideration in foreign exchange by way of direct remittance to its bank in India. During the relevant previous year, the assessee entered into 9 foreign exchange forward contract....
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....ing the taxable income. Ld. CIT DR further submitted that as per said instructions in respect of actual crystallized loss, the AO is instructed to verify whether the losses are on account of speculative transaction as specified u/s 43(5) of the Act and to decide in accordance with them. Therefore, above instructions render claim of deduction for mark to market losses provided for in the books in respect of open contracts untenable. Ld. CIT DR also contended that the claim of national loss is not allowable and it is also relevant to examine that whether at the time of booking loss, the contract was completed and performed by way of actual physical delivery of foreign exchange, otherwise the same has to be treated as speculative transaction and notional loss thereon cannot be claimed as allowable. 44. Ld. CIT DR fairly submitted that in the DCIT vs Bank of Bahrain and Kuwait (supra), Special Bench of ITAT while holding the MTM losses in respect of foreign exchange contracts debited to P&L account has held as allowable with certain observation but this creates a situation where on the other hand special bench decision allows MTM loss while on the other hand CBDT instructions mandat....
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....as its foreign currency receivable and forecasted sales transaction by entering into forward contracts with its banks. Ld. Counsel pointed out that the assessee accounts for forward contract based upon a consistently followed accounting policy as stated in its audited financial statement and forward contracts were undertaken from the authorised dealer bank in terms of FEMA regulations notified by the RBI and as per RBI regulations where the amount is not ascertainable, the forward contract may be taken on the basis of reasonable estimates expected export receipts. 46. Ld. Counsel has further drawn our attention towards order of ld. DRP and submitted that it is undisputed fact that all forward contracts were ultimately settled by delivery of contracted USD and this fact was verified by the DRP, therefore, the same cannot be terms as speculative transaction u/s 43(5) of the Act and therefore, there is no question of applicability of proviso to section 43(5). Ld. Counsel further pointed out that case laws relied by ld. CIT DR are in the context of cancellation of forward contracts and settlement of contract through payment of difference between the value of foreign exchange in contrac....
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.... dispute in A.Y. 2008-09. Therefore, the allowability of the loss on actual payment in A. Y. 2009-10 has been made subject to the allowability of the loss for A.Y. 2008- 09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee in this year. This ground of the assessee is allowed." 48. In AY 2008-09, the claim of loss of Rs. 20,55,724 was claimed by the assessee with following submission and contentions:- "5.1 During the previous year 2007-08, the appellant entered into foreign exchange forward contracts with banks in order to hedge foreign currency fluctuation and incurred a (net) foreign exchange loss of Rs. 20,55,724/- as a result of "marking to market" the forward contracts that were outstanding on March 31, 2008. 5.2. Ld. Counsel for the assessee Shri Sandeep Chaufla contends that: (i) There is no dispute about the incurrence of this loss as in the subsequent....
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....s admissible? This for the reason that in this case, the FCs are not fully supported by the underlying export invoices both in terms of the amount as well as the tenor. Thus, an attempt was made by the Panel to ascertain as to what extent and how the assessee has used these FCs? The said position is given in the table below: DETAIL OF OUTSTANDING FORWARD COVERS AS ON 31ST MARCH, 2009, FOR WHICH INVOICING DONE TILL MARCH, 2009 Contract No. Contract Date Contract Value (US $) Invoice Date Invoice Amt. USD Invoice Amt.- INR Underlying Assets as at 31.03.09 FIRC No. FIRC Date 146164 6-Aug-08 2,900,000 Oct-08 Nov-08 Dec-08 632 144,247 2,755,121 31,640 7,208,024 131,942,759 YES YES YES 156473 2-Apr-09 146166 6-Aug-08 2,900,000 Oct-08 Nov-08 Dec-08 Jan-09 Mar-09 (5,001) 33, 512,400 2,392,577 (9) (250,495) 1,627 24,538,846 116,877,386 (452) YES YES YES YES YES 157124 4-May-09 146167 6-Aug-08 3,000,000 Jan-09 Feb-09 Mar-09 830,550 2,169,380 70 40,572,363 108,230,382 3,567 YES YES YES ....