TaxTMI 
TaxTMI 
2019 (11) TMI 269
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....ue for Assessment Year 2009-10 (in ITA No.1047/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-....
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....ring the financial year 2006-07, the Tega Industries Ltd.( Assessee), set up Tega Investment 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 assesse....
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.... under article 141 of the Constitution. In Indian Oil Corporation Ltd. V. State of Bihar (1987) 167 ITR 897, AIR 1986 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 o....
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....y funds to Tega Bahamas given its skewed debt - equity ratio evident from its balance sheet. Thus it is clear that the intention of the assessee for funding the SPV was that 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 th....
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.... ii. The assessee's equity investment in Tega Bahamas was of Rs. of 23 lacs. It additionally provided a loan amounting to Rs. 80 lacs to it. Further, in order to fund the acquisition of the Tega Beruc South Africa (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 ....
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....rd party scenario without the backing of any Group Company. It is the assessee's case that no third party would have provided the loan to Tega Bahamas given the minimal amount of capital in its books and the lack of operating profits available at its disposal. 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....
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....o relied on various ( OECD) guidelines dealing with the arm`s length principles in relation to guarantee. The Ld AR also relied on the following judicial precedents: (i) Bharati Airtel Vs. Addl.CIT [2014] 63SOT 113 (ii) Redington India Ltd Vs. Jt. CIT [2014] 49 Taxmann.com 146 ( Chennai) (iii)Videocon Industries Ltd Vs. 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 t....
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....e assessee have been supported by the facts and precedents ( case law) cited above. As the assessee`s expectation from provision of loan and guarantee are not that of a lender or guarantor i.e. to earn a market rate of interest or guarantee fee, rather, the expectation was of a shareholder- to protect its investment interest, help it to achieve acquisition of Tega Beruc for furtherance of its own business and 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....
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....idiary company has a low capital that is, share capital only Rs. 23 lakhs, therefore without injecting the funds, it was not possible for the subsidiary company to run the business for the benefit of the holding company and entire group. Therefore, the loan injected by the holding company to its subsidiary company is kind of a quasi equity, i.e. in the form of equity. For benchmarking the interest rate on loan, either an internal 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. th....
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....unal additional evidences and directed ld. TPO/A.O for fresh examination. Accordingly, we also direct the ld. TPO/Assessing Officer to examine credit rating of Taga Australia at "BBB" and Tega US at "AA" which was computed by assessee by applying scientific and logical method. Therefore we restore this issue to the file of the TPO/AO with the direction to ascertain the arm`s length price of the loan. Therefore grounds raised by Revenue are dismissed. 13. Other grounds 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, t....
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....rding loss from option contracts in foreign currency with banks held as "Speculative loss". This covers Ground No.2 raised by the Revenue for Assessment Year 2009-10, Ground No.1 raised by the Revenue in Assessment Year 2010- 11 and Ground No.1 raised by the Revenue in Assessment Year 2011-12." 19. Brief facts qua the issue are that during the scrutiny proceedings, assessing officer, noticed that assessee has debited Rs. 4,74,97,275/- as loss from option contracts of currency with bank. 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. 4,74,97,27....
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.... as well as before me, I find that during the relevant year, the appellant was engaged in the business of manufacture and export of engineering goods. From the annual accounts of the appellant for the year under consideration, it is observed that the appellant's turnover for the year under consideration and for the subsequent year was Rs. 163.42 crores, and Rs. 173.06. Out of the same, export turnover accounted for Rs. 110.99 crores & Rs. 103.32 respectively, It further emanates from the details furnished 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 co....
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....t had entered into option contracts for overall export orders worth Euro 1.2 million and Euro 3.6 million, but the maturity/strike periods were spread over the period beginning from and ending on Sep 2007 to Aug 2008 & Nov 2007 to October 2010 respectively. On attaining the maturity period/strike period, the relevant option contracts were terminated and at the relevant times the banks issued FX contract confirmations, copies of which were furnished both before the Ld. AO as well as if this appellate forum. In these FX contract confirmations, the Banks confirmed 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 tradin....
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....6/07 45,635 LKAB 301085-00-STFG dt 03/07/07 1,09,880 Biliden Mineral AB 717664/BAKMALI dt. 11/1/07 48,220 TBK 200705.25 dt 24/05/07 36,639 TOTAL 12,22,524 8. The appellant-company has placed on record, copies of the above underlying i.e. the export orders, for which the currency hedge was taken from Axis Bank. Similarly, option contract of EUR 3.6 million with Citibank was entered into to hedge the currency fluctuation risk in respect of the export orders received of equivalent amount from Tega Beruc South Africa Pty Ltd. From these facts, I find that the option contracts which the appellant 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 t....
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....9;export sales', Instead of disclosing the gain on account of currency fluctuation separately, the gain realized on exchange fluctuation was credited in the P&L A/c under the nomenclature of 'Sales'. The transactional documents therefore clearly supported the contentions of the Ld. A.Rs that the option contracts which the appellant had entered into were connected intrinsically with assessee's business of export of industrial goods and the transactions were not in foreign currency simplicitor as alleged in the assessment order. 12. The issue as to whether the loss incurred by an assessee in foreign currency forward contracts or option contracts executed against 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....
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....he 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 delivery 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 his 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 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. " ....
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....) of the Indian I.T. Act, 1922. "Contract settled" meant contract settled before breach. After breach of contract, the cause of action was no longer based on the contract itself but on its breach. Where the money which the assessee received was in settlement of the amount of damages suffered by the assessee by reason of breach of the contract to deliver, it was held that the receipt was not a receipt from a speculative transaction as defined in Expln. 2 and the money received was not liable to be set off against speculation loss of earlier years. This view has been consistently followed by this court. Reference may be made to the decision in the case of C1T v. Ramjeevan Sarawgee & Sons [1977] 107 ITR 845, where this court also considered 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 decisi....
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....nt assessee that the activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-11 is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's 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 cas....
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....der for Indian Raw Cotton of 4409200 LBS of the value of 31,74,624 US $ equivalent to 10,00,000 Euros, to supply to one M/S.Nassa Spinning Ltd., Bangladesh. The contract was cancelled by HB Cotton who was agent of M/S.Nassa Spinning Ltd., Bangaldesh on 21.10.2008. The period of the contract for supply of cotton to Bangaldesh was upto 22.1.2009. Since the contract was cancelled by communication dated 24.10.2008, the Bank intimated the Assessee that in view of the adverse fluctuation of Euro currency, the Assessee had to bear the loss of Rs. 1,56,80,527 because the booking rate as on 17.7.2008 was 1.5711 the cancellation date was 22.1.2009 on which date the rate was 1.2613. Thus the Assessee suffered a loss on the forward contract in question. From the sample case set out above it 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) Lt....
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....h were more beneficial instead of conversion as per forward contract rates. Relevant details in this behalf are furnished in a statement annexed to the paper book of the assessee. Even, copies of the relevant export orders are included in the paper book. Due to cancellation of the forward contracts partially or fully, the assessee had to pay the difference between the contract rate and the market rate to the bank. Such payment was a business loss incurred by the assessee in course of its export business and is Jayant Kr. Bhura AY 2000-10 an allowable deduction. The assessee had filed before the AO copies of all the 16 material export orders in the forward contracts relating to which loss of Rs. 3,78,44,872/- was incurred in support of his contention that forward contracts were made on the basis of export 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 contentio....
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....e of Rs. 80,491/- which was claimed by the assessee as revenue expenditure. The Assessing Officer disallowed the claim. The Hon'ble High Court held that the assessee was not a dealer in foreign exchange and the foreign exchanges were only incidental to the assessee's regular course of business and the loss was thus not a speculative loss but incidental to the assessee's business and allowable as such. Facts in the present case are very similar. Admittedly, the assessee is not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with the banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the Bank and thereby incurred 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 Badrid....
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.... appeal is allowed." 17. On a careful perusal of these judgments and taking into account the facts narrated in the foregoing, I find that the ratio laid down in the above decisions is squarely applicable to the appellant's case. As per the transactional documents, it was evident that the assessee had entered into foreign exchange option contracts to guard against exchange fluctuation risks associated with realization of export sale proceeds. In the option contracts the Bank categorically stated that the contracts were entered into against underlying in form of export orders. The evidence on record also establish that during the contractual period when the options matured, the appellant had executed expoft orders and also export proceeds were realized. Export sales were realized at the exchange rates prevailing at the time of realization. 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 opt....
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.... Bench to condone the delay. We have heard both the parties on this preliminary issue. Having regard to the reasons given in the petition, we condone the delay and admit these cross objections filed by assessee. 25. After giving our thoughtful consideration to the submissions of the parties and perusing the judicial decisions relied upon by the ld. Counsel for the assessee. We note that the education cess is allowable for deduction u/s 37(1) of the Act. For this, we rely on the judgment of the Coordinate Bench of ITAT Kolkata in the case of ITC Limited vs. ACIT in ITA No.685/Kol/2014, for A.Y.2009-10, order dated 27.11.2018 wherein it was held as follows: "12. The assessee's additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317.0 u/s 37 of the Act. We note that hon'ble Rajasthan high court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxe....