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TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 269
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....7/Kol/2017), for Assessment Year 2010-11 (in ITA No.1048/Kol/2017), for Assessment Year 2011-12 (in ITA No.1049/Kol/2017) and Cross Objections filed by the assessee in C.O No.31/Kol/2019, C.O.No.32/Kol/2019 and C.O. No.33/Kol/2019; respectively, contain multiple grounds of appeal. However, at the time of hearing, we have carefully perused all the grounds raised by the Revenue as well as cross-objections raised by the assessee in respective years. We find that most of the grounds raised by the Revenue, as well as assessee are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and impugned grievance of the Revenue and the assessee as well. With this background, we summarize and concise the grounds raised by the Revenue as well assessee as follows: Transfer Pricing Grounds (i). Disallowance/addition on account of Corporate Guarantee fee (vide Ground No.3 to 5 raised by the Revenue in Assessment Year 2009-10 and Ground No.2 to 4 raised by the Revenue in Assessment Year 2010-11 and Ground Nos.2 to 4 raised by the Revenue in Assessment Year 2011-12. (ii).Transfer Pricing Adjustment on account of....
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....ment Ltd-Bahamas, an associate enterprise (AE), as a special purpose vehicle in the Bahamas for undertaking an acquisition of companies based in South Africa i.e. 1) Beruc Equipment Pty Limited and 2) Bentod Manufacturing Limited. These two companies were merged to form Tega Beruc South Africa Pty Ltd. The assessee provided a shareholder loan to Tega Bahamas and a corporate guarantee to ICICI bank UK, to fund Tega Bahamas for acquiring the two south African entities. The TPO made transfer pricing adjustment in respect corporate guarantee @ 2.5% and created additional charge in connection with the corporate guarantee at Rs. 9,00,979/-, observing the following: "36 In a recent case, Hon`ble ITAT, Hyderabad Bench in the case of Four Soft Ltd. (ITA No.1495/HYD/2010) have stated the following in paragraph 21 of their order: We have considered the rival submissions and perused the material available on record. We find that the TP legislation provides for computation on income from international transaction as per section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does no....
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....6 SC 1780, this court observed that the questions which can be said to have been decided by this court expressly, implicitly or even constructively, cannot be reopened in subsequent proceedings; but neither on the principle of res judicata nor on any principle of public policy analogus thereto, would the order of this Court bar the trial of identical issue in separate proceedings merely on the basis of an uncertain assumption that the issues must have been decided by this court at least by implication." Based on the above, and on the fact that Hon'ble Tribunal did not take into account that a service has been provided by the assessee and even otherwise, any transaction which has a bearing on the profit or loss of the entitles involved is covered by section 92B, it has to be humbly stated that the decision cited may not have a bearing to the present case. 39. It also needs to be mentioned that the Tax Court of Canada decision, mentioned earlier, has been upheld by the Canadian Federal Court of Appeal (Citation: 2010 FCA 344 in judgment delivered on December 15, 2010. 40. What remains to be looked into now is the issue of benefit arising to the subsidiary on account of the ....
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....t of an investor and not a lender. In light of the same, it would be appropriate to classify the funds loaned and guarantee provided to infuse third party funds as quasi-equity in nature and as a shareholder service meriting no consideration. The Assessee has also submitted that depending on the facts and circumstances of the particular case, it may be appropriate for tax administrations in applying the relevant transfer pricing provisions to examine the purpose and object of providing the funding in the form of debt vis-a-vis infusion of equity. The permissibility of infusing additional amounts of funding required in the form of debt would need to be viewed from a commercial viability perspective and whether such loans would have been advanced by third parties in the instant case. 5.1.7 We have carefully read the submission of the Assessee to understand as to what action is the appropriate for the Tax Administration in Transfer pricing case. Assessee submits that the Tax Administration should examine the purpose and object of providing the funding in the form of debt vis-a-vis infusion of equity. Accordingly, we have examined the purpose of providing the funding in the form of d....
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....ca (Pty) Ltd. (Tega South Africa), Tega Bahamas obtained a loan from ICICI Bank UK amounting to USD 1.4 million (approximately Rs. 5 crores) on the basis of a corporate guarantee provided by the assessee to ICICI Bank UK. iii. The assessee's letter dated 14.06.2012 mentions that "While deliberating on an arm's length price that could be charged for the loan provided to Tega Bahamas, the assessee was of the view that the loan funds provided to Tega Bahamas was a means to mitigate its risk vis-a-vis infusion of additional funds in the form of equity and hence the loan funds provided were quasi-equity in nature. Additionally, in connection with the guarantee provided to ICICI Bank UK, the assessee opted for providing a guarantee vis a-vis blocking its own funds to facilitate its objective of acquiring the two South African companies. In light of the same, the assessee was of the belief that the same was in the nature of a shareholder service and the loan funds generated from such guarantee provided was quasi - equity in nature and hence merited no consideration. iv. The assessee has cited section 92(1) of the IT Act, 1961, Article 9 of the OECD MC and section 147 of the ....
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....isposal. vii. The assessee has also referred to HMRC INTM 542005 and drawn the conclusion that these guidelines allow for situations where a borrowing entity (like Tega Bahamas) would not have entered into the loan arrangement on its own account as it would not have been able to obtain the loan on a standalone basis. It is also suggested that based on these guidelines, it can be said that as the guarantee was provided by the assessee to enable Tega Bahamas to obtain the loan to further its own business interest i.e. acquisition of the South African entities, the service rendered by the assessee in the form of provision of guarantee could be said to be a shareholder service not meriting any consideration. viii. The assessee has then referred to HMRC INTM 542012, 542040, 542090, and 542100 and suggested that these also support the contentions made by it. ix. The assessee has also referred to paragraph 1.65 of the OECD Transfer Pricing Guidelines (2010) and suggested that it allows for loan to be recharacterised as equity. x. The assessee has then referred to paragraph 7.9 of the OECD Transfer Pricing Guidelines (2010) and suggested that its activities are fully covered by thi....
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..... Addl.CIT[2015] 55 taxmann.com 263 (Mum) (iv) Micro Ink Ltd. Vs. Asst.CIT [2015]63 taxmann.com353 ( Ahmedabad-Trib) Specially in the case of Micro Ink Ltd. Vs. Asst.CIT [2015]63 taxmann.com353 ( Ahmedabad-Trib), the hon`ble Tribunal held that if guarantee is shareholder activity then no TP adjustment is required. Vide para 48 and 51, of the decision which read as under: "Issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. ITAT have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both the....
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....nd get return in terms of appreciation in value and dividends. It can be verified from the fact that no third party would have agreed to grant loans, on an independent basis, to the tune of Rs. 5 Crores to Tega Bahamas given its skewed debt-equity ratio reflected in the balance sheet, as equity funding is mere Rs. 23 Lakhs, therefore in the present case the guarantee is a shareholder activity hence no TP adjustment on account of corporate guarantee should be required. Accordingly, we direct the Ld.DRP/AO to delete the addition." 7. As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in assessee`s own case and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench (supra) and the ld CIT(A) deleted the addition by following the judgment of the Division Bench. We find no reason to interfere in the said order of the Division Bench, therefore, we uphold the order of ld CIT(A) in deleting the addition made by AO/TPO on account of corporate guarantee fee, for A.Y 2009-10, 2010-11 & 2011-12. Therefore, grounds raised by the Revenue are dismissed. 8. T....
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....rnal CUP or an external CUP in the same priority of application could have been applied in a case. An internal CUP could be applied where same/similar transactions (i.e. with same/similar terms and conditions) have been entered into by the appellant / AE with third parties. If no internal CUP is available, an external CUP could be looked at i.e. transactions entered outside the group between third parties under same/similar terms and conditions. The Ld AR cited an example stating that , if the price charged in the open market for a particular type of product could be say INR 100. In order to manufacture that product a person incurs a cost of INR 105 or INR 60. The market pays INR 100 only as the market price is INR 100 and not INR 105 or INR 60 i.e. the cost incurred by him. With respect to credit spread, the Ld. TPO mentioned that the same needs to be based upon the creditworthiness of the borrower, citing detailed explanation about credit rating, the agencies determining the same and Standard & Poor's Corporate Rating Criteria as provided by them in a booklet issued in 2006 (S&P Criteria). However, the Ld. TPO erred in applying the same in a biased manner and came to a conc....
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....rounds raised by the Revenve "(i). Disallowance under section 14A r.w.r. 8D of Rs. 4,51,190/-. This ground is raised by the Revenue in Assessment Year 2009-10 only." 14. Brief facts qua the issue are that during the scrutiny proceedings, the AO noticed that assessee has earned exempt income to the tune of Rs. 13,28,486/-. The assessee has disallowed expenses against exempted income. However, AO noticed that the determination of expenditure incurred in relation to exempt income should be done as per Rule 8D of the I.T. Rules. The AO worked out the disallowance as per Rule 8D of the Income Tax Rules at Rs. 4,51,190/-. The Assessee had disallowed only Rs. 3,50,000/-, which was lower than Rs. 4,51,190/-. Therefore, the AO disallowed the balance amount of Rs. 1,01,190/- (Rs. 4,51,190 - Rs. 3,50,000). 15. Aggrieved by the addition made by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has partly deleted the addition made by the Assessing Officer. Aggrieved, the Revenue is in appeal before us. 16. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and ....
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....ank. The assessing officer was of the view that it is a speculative loss and cannot be set off from business income. The assessee was asked to explain the nature of option contracts and to explain further that whether they are for the purpose of business? In response, the assessee submitted before AO that the option contracts with banks were entered to offset the future risk that arise in normal business activities and hence should be allowed as business loss. However, the AO rejected the contention of the assessee and held that the option contract in foreign currency with banks is not covered by any of the four clauses mentioned in section 43(5) of the Act and therefore, the loss of Rs. 4,74,97,275/- should be treated as speculative loss and cannot be set off from business income. 20. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer. "1. I have carefully considered the submissions of the assessee-company, and also the discussions made by the Ld. AO in the impugned order. In Para 4.1 of the impugned order, the Ld. AO observed that in its P&L A/c, t....
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....nished that the assessee had executed export orders in various foreign currencies such as US dollars, Euros, Australian Dollars etc. Since the assessee's business had sufficiently large exposure to international trade and in the post-2008 scenario prevailing internationally, Indian Rupee was fluctuating substantially against major currencies of the world. The appellant therefore deemed it necessary to make arrangements to hedge its currency risk which might have been caused due to adverse currency movements. Accordingly, as a prudent business practice, the appellant entered into long term option contracts with Axis Bank, Citibank & Standard Chartered Bank. Copies of the option contracts as well as the contract confirmations upon cancellations were filed. On perusal of the option contract dated 13.09.2007 with Axis Bank, it is observed that in the said agreement the Bank expressly stated as follows: "The following structure has been done to hedge your underlying exports. You agree to sign all the relevant documents and provide the details of the underlying. The client acknowledges that AXIS Bank Ltd has explained each element of the transaction and it is a sophisticated inve....
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....irmed as follows: "(b) The underlying exposure for the Transaction is genuine and no cover exists with any other bank and no cover from any other bank will be taken against the same exposure, during the currency of the contract with Citibank. (c) The maturity and the amount of the contract does not exceed the tenor and the amount (or reasonable estimate of the amount where is exact amount is not known) respectively, of the underlying exposure.' 6. From the above affirmations by the Banks in the transactional documents, it is quite evident that the appellant-company did not conduct any trading in the foreign currency itself so as to attract provisions of Section 43(5) of the Act. In fact, the extant provisions of FEMA, did not permit the private parties other the Banks and Financial Institutions to conduct proprietary trading in foreign currency. Under the relevant provisions of FEMA, the Indian residents are permitted to enter into forward contracts in foreign currency or option contracts only when they can prove that such transactions are being entered into for the purposes of managing borrowings or investments or for the purpose of hedging the underlying assets or liabi....
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....ant entered with the Banks were backed by the export orders received by the appellant from its foreign customers in the course of its business of manufacture & export of engineering goods. 9. It further transpired that forward contracts were having different maturity periods. The option contracts were executed in a manner whereby an individual contract's maturity would coincide with the realization of export sale proceeds by the appellant. In support, the appellant furnished details of matured/cancelled option contracts vis-a-vis the details of export proceeds realized correspondingly. From the details furnished, it appears that the option contracts which matured and got cancelled were closely connected with the export realization. For example, on 04.07.2008, the option contract of USD 2,00,000. Prevailing equivalent was to mature at a strike price of Rs. 40.25/$. In the same month, the appellant had export realization of USD 2,00,000. Prevailing exchange rate at which the monies were actually received was Rs. 43.23/$. Since the export realization was made @ 43.23, the same was included in the export sales value and was credited in the Profit & Loss Account as "export sales....
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....t underlying assets in the form of foreign currency receivables or payables has engaged attention of various judicial forums for long. In international trade, obtaining foreign currency forward contracts or entering into foreign currency derivatives is a standard business practice which is resorted to guard against likely losses arising from adverse exchange rate fluctuations. The Hon'ble jurisdictional Calcutta High Court had considered this issue in the case of CIT Vs Soorajmull Nagarmull (129 ITR 169). In that case the assessee firm was carrying on business of export and import of jute goods. With a view to hedge its international trade, the assessee executed foreign exchange forward contracts which were partly used against the imports made and the unutilized contracts were cancelled and by paying the difference. The AO disallowed the loss incurred on cancellation on the ground that such loss was speculative loss since the contract was settled otherwise than by delivery. On these facts the Hon'ble High Court held as follows: "The point upon which learned advocate for the revenue stressed was that, even there, there was a breach of contract for non-performance of the co....
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....ct of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; shall not be deemed to be a speculative transaction. " Here there is no finding that entering into foreign exchange contract was the nature of the business of the assessee. This was only an incidental part of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contracts as such. Foreign exchange contracts were only incidental to the assessee's regular course of business. Therefore, all the arguments regarding whether it conies within the Expln.2, in our opinion, is not quite relevant because the loss was not sustained in speculative transactions which are in the nature of the business of the assessee. The AAC had made a categorical finding to this effect in his order which has been upheld by the Appella....
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....idered the decision of the Supreme Court in the case of Davenport & Co. P. Ltd. v. CIT [1975] 100 ITR 715, on which reliance was placed on behalf of the revenue and it was distinguished. We are in respectful agreement with the observations of Mr. Justice Sen in that case at p. 849 of the report in so far as it distinguished the decision of the Supreme Court in the case of Davenport & Co. P. Ltd. [1975] 100 ITR 715. We may also refer to the decision of this court in the case of CIT v. Arun General Industries Ltd. [1977] 110 ITR 286, where all these previous decisions of this court have been noted. Except the Madras High Court in the case of R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353, all other High Courts have taken a similar view. The decision of the Supreme Court in the case of Davenport & Co. P. Ltd. [1975] 100 ITR 715 upon which reliance was placed by learned advocate for the revenue is in our opinion not relevant in view of the nature of the transaction with which we are dealing. Furthermore, in view of the clear finding of the AAC and the Tribunal, we are of the opinion that question No. 1 must be answered in the affirmative and in favour of the assessee. 13. The rat....
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.... contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. Vinodkumar (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar (supra) are identical / similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar (supra), the Tribunal held the forward contract on facts before it to be speculative in nature in view of Section 43(5) of the Act. However, it appears that the decision of this court in CIT vs. Badridas Gauridas (P) Ltd. was not brought to the notice of the Tribunal when it rendered its decision in S. Vinodkumar (supra). In the above case, this court has held that forward co....
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....is clear that the forward contract in question was purely hedging transactions entered into by the Assessee to safeguard against loss arising out of fluctuation in foreign currency. Such transactions have been held in the following cases to be not speculative transactions falling within the ambit of Sec.43(5) of the Act, CIT Vs. Soorajmull Nagarmull (1981) 5 Taxman 289 (Cal), CIT Vs, Badridas Gauridu (P) Ltd., (2004) 134 Taxman 376 (Bom), CIT Vs. Friends and Friends Shipping Pvt.Ltd., Tax Appeal No.251 of 2010 dated 23.8.2011 and CIT Vs. Panchmahal Steel Ltd. Tax Appeal No.131 of 2013 dated 28.3.2013 by the Hon'ble Gujarat High Court. The conclusions of the CIT(A) on this issue, in our view therefore deserve to be upheld. Accordingly, the ground of appeal raised by the revenue in this regard is rejected." 16. The identical issue was considered by yet another coordinate Bench of the Hon'ble ITAT, Kolkata in the case of Jayant Bhura vs ITO (ITA No.901/Kol/2013) dated 29.10.2015 wherein the ITAT had observed as follows: "9. We find from the above facts that the entire basis for disallowance of loss for AO was on the assumption as if ban on export of maize was the sole reason f....
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....port orders in hand. The purported findings of the AO that the assessee had not submitted the export orders or that forward contracts were booked without having export orders in hand are contrary to the record. The assessee has since obtained from the AO certified copies of the export orders filed by him in course of the assessment proceedings which bear out the assessee's contention. Even AO has not correctly prepared Annexures A and B to the Assessment order as he has omitted to incorporate in the said Annexures the details of the export orders in respect of which the forward contracts were booked. As such, the Bank in its response to the AO, stated that the forward contracts were booked based on past performance but simply because the assessee did not submit copies of the export orders to the Ban does not mean that the assessee did not in fact have the export orders in hand. As against export orders of US$ 2,16,08,278, the assessee had entered into forward contracts only for US$ 1,00,70,000. Due to market conditions, such forward contracts could be utilised only to the extent of US$ 53,32,334.34 and the remaining contracts for US$ 47,37,665.66 had to be cancelled. We furth....
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....d certain expenses. These expenses the assessee claimed by way of expenditure towards business. Accordingly, Hon'ble High Court held that the transaction can be stated to be in speculation as to cover under sub-section (5) of section 43 of the Act. 11. Further, this issue is also covered by the judgment of Hon'ble Bombay High Court in CIT v Badridas Gauridu (P) Ltd., (2003) 261 JTR 256 (Bom), wherein, the judgment of the Hon'ble Calcutta High Court was followed. To quote from the judgment of the Hon'ble Bombay High Court (at pages 257-8 of 261 HR) : "The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee's regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under section 43(5) of the Income-tax Act, "speculative transaction" has been defined to mean a transaction in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. Ho....
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....n. The export sales realization was made at exchange rates higher than contracted rates with Banks and therefore the assessee had opted to realize the export value at the prevailing rates instead of the option rates. The higher realization of exports was credited in the P&L A/c in the form of export sales. However, upon termination of option, the assessee settled the contracts by paying the premium & claimed it as loss on option contracts. These transactional documents therefore lead only to one conclusion i.e. the option contracts were directly and intimately connected with assessee's business of manufacture & export of industrial products. The option contracts were entered into by the appellant to guard against adverse consequences arising from exchange fluctuation risks and there was no intention on the assessee's part to deal in foreign currency simplicitor. In view of these facts which are apparent from the materials & documents available on record, I have no hesitation in holding that the loss had occurred in the course of assessee's business and the same was allowable in computing business income. The Ld.AO is accordingly directed to allow the deduction for loss ....