TaxTMI 
TaxTMI 
2018 (4) TMI 428
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....y when such expenditure cannot be part of the export turnover defined in clause [iv] of Explanation 2 to Section 10A of the Income Tax Act 1961, which clearly states that they need to be excluded. 3. Any other ground that may be taken up at the time of hearing." 3. On verification of the details in Forms 56F, the AO noticed that the assessee did not exclude communication charges, payments made abroad to foreign subsidiaries and forex realization beyond 6 months in 1 case related to Unit - 3 from the export turnover. The AO, therefore, excluded from the export turnover while computing deduction u/s 10A. 3.1 When the assessee objected the same before the DRP, the DRP directed the AO to reduce telecommunication charges not only from export turnover but also from the total turnover for the purpose of computing deduction u/s 10A. 4. Aggrieved by the order of DRP, the revenue is in appeal before us. 5. Considered the rival submissions and perused the material facts on record. The Hon'ble Courts and the coordinate benches of ITAT have consistently held that the internet charges have to be excluded both from the export turnover as well as from the total turnover wh....
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....te guarantees, namely, the first one is for US $ 3.5 Million to City National Bank, USA on behalf of its Associated Enterprise, Infotech Enterprises America Inc. The TPO considered this as an international transaction and proposed to determine its arms length price at Rs. 35,66,500/-worked out @ 2% on the outstanding balance of the loan as on 1.4.2009 of Rs. 17,83,25,009/- as commission for providing bank guarantee. The second guarantee was given on behalf of its AE, Infotech Enterprises Limited, UK in favour of Ordinance Survey, UK for an amount of GBP 1.6 million. The TPO considered this also as an international transaction and proposed to determine its arm's length price at Rs. 23,31,552/- worked out @ 2% as commission on the outstanding balance of the loan as on 1.4.2009 of Rs. 11,65,77,600/-. 9.1 Before the DRP, the assessee submitted the ITAT in case of Glenmark Pharmaceutical case upheld the guarantee commission rate @ 0.53%. He, therefore, submitted that since the rate adopted by the TPO @ 2% is too high, the rate may be reduced suitably. 9.2 The DRP, however, confirmed the action of the TPO. 9.3 Considered the rival submissions and perused the material facts o....
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....w, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute "International Transaction" within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect." Respectfully following the above decision, we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Accordingly, the ground raised by assessee is allowed. 10. As regards ground no. 3 regarding unrealized gain on foreign exchange forward contracts of Rs. 9,04,81,526/-, the assessee deducted this amount in the computation of income. However, the AO added back the said amount to the income of the assessee on the ground that there was no reason to deduct the same in computation. 10.1 Before the DRP, the assessee argued that this gain represents unrealized gain and that it was arrived at only by making the contract ....
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....of income though it is taken into accounts in the books and credited to the profit and loss account 10.5 On this issue, the panel is of the view that since assessee company is following mercantile system of accounting regularly, any gain or loss on forward contracts has to be considered in the computation of total income. As per Accounting Standards on this item both loss and gain are to be reckoned as an end of accounting period The AO has no option except to follow the prescribed procedure as per law. The panel do not interfere in his action as there is no infirmity. Accordingly, the assessee's objection is rejected" 20. It is submitted that there is a fallacy in the above decision of the Hon'ble DRP. The DRP having directed to allow loss on revaluation in A.Y.2010-11 which was not claimed in earlier year, by following the method of computing taxable income as per rule of consistency, the DRP ought to have directed to exclude profit/gain on foreign exchange transactions which were valued on 'mark to market' basis. Notional losses as well as gains should not be taken into account while computing taxable income 21. In the case of ....
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....f income tax is on income and though the income tax Act has taken note of the twin points of time at which the liability to tax is attracted viz., the accrual of income or its receipt, yet, the substance of the matter is income and if income does not result at all, there cannot be a tax- even though for purposes of book keeping, an entry is made about an hypothetical income which doesn't materialize and a mere book keeping entry cannot be income unless income has actually resulted. The question whether there is a loss or profit on foreign exchange transactions can be ascertained after the settlement of the forward contracts and not before and so long as that stage has not been reached the loss can only be notional and not actual or real and notional loss cannot be claimed as a deduction. Whether a loss or profit, the principle applicable would be the same and the estimated profit, till the settlement of the forward foreign exchange contracts, could be regarded only as notional and not actual or real and such notional profits cannot be assessed" (Emphasis supplied) 23. It may kindly be observed that the Madras High Court has clearly held notional profit on outstanding c....
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....T Act. It was also held that income has to be computed in the light of the Accounting Standard (AS) - 11. As per the relevant portion of the head note of this decision/it was observed as under: "AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. In case of the revenue items falling under section 37(1) para 9 of AS-11, which deals with recognition of exchange differences, needs to be considered. Under this para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period [Para 18]. " Gains on Mark to mark....
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....f CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326. The Revenue cannot adopt dual standards while taxing losses and profit arising out of valuation of liabilities for transactions involving foreign exchange 30. It is submitted that as laid down by the Hon'ble Apex Court in the case of Woodward Governor India (P.) Ltd. [312 ITR 254] in para 10 to 17 (Pages 260-265 of ITR), the Department having accepted the method consistently adopted by the appellant in earlier years, it cannot be permitted to adopt different view for the year under consideration to add only gains on revaluation but ignore losses on revaluation. In this case, the apex court has held that a method of accounting followed by the assessee continuously for a given period of time has to be presumed to be correct till AO comes to a conclusion for reasons to be given that the said system doesn't reflect true and correct profits. It has observed in para 10 of its order as under: '10. As stated above, on facts in the case of M/s Woodward Governor India (P.) Ltd the Department has disallowed the deduction/debit to the P&L account made by the assessee in the sum ....
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....uld come into play. In the instant case, the said accounting system had been followed for a number of years and there was no proof that there had been any material change in the activities of the assessee as compared to the earlier years. Nothing had been brought on record to show that there had been distortion of profit or the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years. [Para 16] Therefore, there was no merit in the instant appeal and the same was to be dismissed" (Emphasis supplied) 34. In the case of CIT v. Margadarsi Chit Fund Private Limited (155 ITR 442), it has been held that before rejecting the system of accounting consistently followed by the assessee by several years and accepted by Department in the past, it must refer to inherent defects in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from books of account maintained by the assessee. 35. In the ca....
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.... no accrual of income in such cases till the contract is settled. 40. In the case of Hindustan Housing Land Development Trust Limited (161 ITR 524), the apex court laid down the following principle: "Income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income the income can be said to have accrued to him though it may be received later on being ascertained, the basic conception is he must have acquired a right to receive the income. There must be a debt owed to him by somebody There must be otherwise expressed debitum in presenti solvendum in future unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he acquired a right to receive the income or that income has accrued to him." 41. As per the above decision of Supreme Court, only the accrued gains can be bought to tax. In this case, the assessee was awarded compensation for the land acquired from him by the government by the arbitrator but the government went in appeal against the award. As the matter was pending before the court, the Supreme Court held that the party could not be taxe....
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....t charge any gain/loss of foreign exchange on notional basis. Further, we have noticed that DRP while adjudicating the provision of loss on forward contracts written back by the assessee in the earlier AY, DRP has allowed the contention of the assessee and at the same time, refused to grant unrealized gain on forward contract. In other words, the DRP has accepted with regard to loss written back and refused to recognize the accounting method followed by the assessee in the case of unrealized gain on forex. As far as the treatment of gain/loss on forex difference, assessee followed consistent method of accounting policies. It is a fact that the gain/loss determined by the assessee based on the closing rates based on mark to market are notional and not real loss or gain as the forward contracts were not concluded. Real gain/loss is only when the contracts are concluded. Therefore, recognition of this notional gain or loss depends upon accounting policies or method of accounting regularly followed by the assessee, since the assessee is following mercantile system of accounting, recognition of gain/loss are traceable over the years. Since, all the notional gain/loss are regularly decla....