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2016 (9) TMI 303
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....ell settled position as upheld in various decisions from the Apex Court. 1.2. That on the facts and circumstances of the case and in the Law, the CIT(A) has committed a gross impropriety by not following the decision of ITAT in assessee's own cases on the claim of foreign exchange fluctuation loss payment and also the mandate laid down by the Hon'ble Apex Court in this regard." 2. From the above grounds of appeal, it transpires that the only question involved in this appeal is whether the ld. Authorities below are justified in disallowing the foreign exchange fluctuation loss to be set off against the business income of the assessee or not. 3. The brief facts of the issue are that the appellant had claimed foreign exchange fluctuation loss of Rs. 12,41,11,179/- in the Profit & Loss account. The appellant was required to provide the details along with documentary evidences in support of its claim and to show cause as to why foreign exchange fluctuation loss of Rs. 12,41,11,179/- should not be disallowed in view of the instruction No. 3/2010 dated 23.03.2010 issued by the CBDT. In response, the appellant explained that the foreign exchange fluctuation loss of Rs. 12,41....
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.... 1. Background Facts. 1.1 Nature of business of assessee: As noted by the AO herself in detail vide para 2 of its order, the assessee is a reseller of Silicon Graphics products. It imports computers (hardware & software) from Silicon Graphics Inc US (SGI being the parent entity) and sells to end customers. The assessee also undertakes warranty and post warranty maintenance services for SGI products in the country. In addition it also provides consultancy services to SGI. Thus, it is abundantly clear as per the noting by AO himself that assessee is engaged in Information technology (IT) line of business by providing IT related purchase/sales / services. The assessee does not at all deals in forex derivatives (i.e. shares/scrips/bonds/stocks in foreign currency) which is a matter of fact and record. As per the audited accounts on record (pages 1-19 PB) there is not even a single rupee income or expenditure accounted for by the assessee on account of forex derivatives. 1.2 Assessee's policy on Accounting for Inter Company payables / receivable in foreign currency & exchange differences: As noted by the AO herself the assessee undertakes import tr....
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....before the lower authorities and noted at various places (for instance page 30 of CIT(A) order) that intercompany payables are on revenue account only. This position is not disputed by any of the lower authorities i.e. AO & CIT(A). 1.5 International transactions with parent entity accepted on an arm's length basis by the department: As submitted before the CIT(A) and noted at internal page 30 & 31 of order of CIT(A) the international transactions undertaken by assessee with its parent entity in the past have been accepted to be on an arm's length basis in the transfer pricing scrutiny assessment orders on record, This position is not disputed by any of the lower authorities i.e. AO & CIT(A). 2. Decision of AO. The AO by essentially invoking the Instruction No. 3 of 2010 of CBDT held vide para 7.5 of its order that the claim of foreign exchange fluctuation loss is a speculative loss and accordingly disallowed to be set off against business income u/s 43(5). The AO had invoked the said instruction which is on altogether a different thing i.e. trading in derivatives whereas on the facts of assessee's case the assessee is in Information Technology....
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.... 4.1 There is a manifest lack of understanding on part of AO & CIT(A) in disallowing assessee's claim on account of foreign exchange fluctuation loss of Rs. 12,41,11,179. In fact they have committed a judicial impropriety in not following the decision in assessee's own cases on the same issue and the decisions of Apex Court which have settled this issue. 4.2 Firstly the reason framed by the AO to the effect that pursuant to CBDT Instruction No. 3 of 2010 the loss claimed by assessee is a speculative loss is manifestly incorrect. At the cost of repetition the said instruction is applicable only where there is a trading in forex derivatives which is not at all the situation on the facts of present case. The nature of business of assessee as noted by the AO herself vide para 2 of its order being that the assessee is a reseller of Silicon Graphics products. It imports computers (hardware & software) from Silicon Graphics Inc US (SGI being the parent entity) and sells to end customers. The assessee also undertakes warranty and post warranty maintenance services for SGI products in the country. In addition it also provides consultancy services to SGI. Thus, it is abundan....
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.... the ground that it is a speculative loss as held by the AO. The sole reason framed by the CIT(A) in confirming the disallowance is that the assessee has claimed foreign exchange fluctuation loss on the entire amount of current liabilities and not on the transaction pertaining to the current year. This is a very elementary fallacy in the understanding of the CITfA). The CIT(A) had just failed to understand a very basic thing that pursuant to the requirements of AS-11; the mandate from Apex court & the decisions in assessee's own cases the entire current liabilities outstanding as at the balance sheet date has to be re-instated as per the closing rate and any foreign exchange gain / loss arising thereby has to be accounted for as an income or expense. 4.5 Entire amount of current liabilities outstanding as at the balance sheet date is to be re-instated as per the closing rate as required by AS-11: decisions from Supreme Court & as held in assessee's own cases on same issue: The CIT(A) has just failed to understand and appreciate that it is the entire amount of current liabilities outstanding as at the balance sheet date which has to be re-instated as per th....
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.... the monetary items have to be translated using the closing rate at each balance sheet date i.e. in every subsequent period. Similarly it has been held by Supreme Court in its decision in the case of Oil and Natural Gas Corporation Ltd. Vs CIT 322 ITR 180 SC in the following words: "12. Applying these factors on the facts of that case, it was held that the "loss" suffered by the assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred." To similar effect it has been held by the co-ordinate bench of ITAT in assessee's own case vide its decision in assessee's case for the preceding years reported in 105 TTJ 191 in the following words: "As regards the question whether the loss can be allowed in the year under consideration even though the time for repayment of t....
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....ctfully submitted that the addition made by the AO with respect to foreign exchange fluctuation loss as sustained by the CIT(A) deserves to be deleted forthwith. 5. On the other hand, the ld. DR strongly relied upon the orders of the authorities below. 6. Having heard the rival submissions and perused the material available on record, we find considerable substance in the contentions of the assessee. The observation of the AO that the assessee did not furnish any evidence/details of exchange loss due to restatement of foreign currency is found factually wrong inasmuch as item wise working of foreign exchange loss of Rs. 12,41,11,179/- on outstanding inter company payables / receivables was duly submitted before the AO & CIT(A) duly acknowledged by the AO & CIT(A). The written reply of assessee given vide letter dated 25.11.2011 reproduced by AO in her order also shows that such details were annexed by assessee with the said reply. Even the ld. CIT(A) has not recorded any finding that no such details were furnished by assessee/appellant. Besides, the outstanding intercompany payables/receivables arising as a result of transactions with the parent entity are as per audited acco....