TaxTMI 
TaxTMI 
2025 (10) TMI 847
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....eletion of addition of Rs 88,83,314/- by the Learned CITA on account of Exchange Difference Derivatives. 3. We have heard the rival submissions and perused the materials available on record. The assessee is primarily engaged in the business of manufacturing of auto components, mainly automotive lighting and signaling equipments, rear view mirrors, sheet metal parts to be supplied to various domestic and overseas customers who manufacture two wheelers and four wheelers viz. scooters, motorcycles, mopeds, trucks, tractors, etc. The return of income for the assessment year 2011-12 was filed by the assessee company on 29-11- 2011 declaring total income of Rs 4,54,80,370/-. The assessment was completed under section 143(3) of the Act determining total income at Rs 23,14,43,240/- after making addition of Rs 17,70,51,673/- against the claim of expense on account of "loss on settlement of target redemption forward contracts" and Rs 88,83,314/- against the claim of expense on account of "Exchange difference - derivatives" and Rs 24,880/- against the claim of deduction under section 80IC of the Act from its undertaking situated at Nalagarh. The claim of deduction under section 80IC of the....
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....ticle 13 of the agreement identified the duration of the contract as 5 years, extendable on an yearly basis thereafter unless either party gives 6 months prior notice to the other party. Article 8 of the agreement seek to lean and gain support from the technical support agreement dated 11-11-2005 on the various items and issues. Post the above two agreements, Ichikoh Industries had placed Letters of Intent dated 18-05-2007 for the prismatic mirror plate and 1-10-2007 for the door mirror plate. The letter of intent refers to the product names, basic unit price with an acceptable range of increase, the production volume, targeted date of production and the price validity periods in the case of the door mirror plate was till 31-03-2010. Post the agreements, the assessee started importing the capital goods and machinery such as line beveller, washing machine prisma, grinding machine prisma, cutting machines, edge grinding machines, washing machines, filter press machine, etc for the manufacture of the above said items. The targeted date of the start of the production as per letter of intent was January 2008. The assessee started to export from February 2008. 6. Based on the letter o....
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....get redemption. The figures were arrived and negotiated based on the anticipated quantities of the export. The price payable and the total Japanese Yen arrived under the forward contracts were closely matching. 8. The Learned AO entertained a view that forward contracts entered into by the assessee were speculative in nature on the following grounds:- "a. There were no legally binding agreements or commitment by the foreign buyers compelling the assessee to make the said supplies; b. The two Target Redemption forward contracts viz. Standard Chartered bank on 9/10/2007 & 19/02/2008 were complex derivatives obliging the bank to sell USD 1,25,000 at a specified rate if the reference USD-JPY exchange rate on a specified date was above the agreed strike rate. It also obliged the assessee to buy USD 2,50,000 at a specified rate if the reference USD-JPY exchange rate on a specified date was below the agreed strike rate. The expiry dates were mentioned in the contracts for each month starting from the month of the contract & ending 36 months later. The buy strike rate was fixed at 108 for the contract dated 09/10/2007 & the contract was terminating on 12/10/2010. Simil....
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....efore, the contention that similar claims have been allowed in the past assessments is devoid of the merit." 9. The assessee furnished detailed written submissions before the Learned CITA filing rebuttal for each of the observations of the Learned AO. The Learned CITA duly appreciated the contentions of the assessee and held that the forward contracts form an integral part and are incidental to the core business of the export of automotive lightings and mirror plates of the assessee and held the said loss to be not speculative in nature and eligible for set off against the normal business profits. The relevant observations of the Learned CITA with regard to allowing the loss of Rs 17,70,51,673/- are as under:- "3.2 Having gone through the various submissions made by the assessee, the order of assessment made by the Assessing Officer and the material placed on the record, it emerges that it is a undisputed fact that the assessee is carrying on the business of manufacturing & supply of Automotive Lighting, Mirrors etc. to various reputed Two-wheeler & Four-wheeler original equipment manufacturers viz HMSI, TVS Motors, Suzuki Motorcycles etc. It also exports its goods to o....
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....ds denominated in JPY commencing from Feb. 2008. However as explained by the assessee the targeted / anticipated annual turnover as agreed in the buy-back agreements could not be achieved due to the collapse of the biggest investment banker M/s Lehmann Brothers in Sep. 2008 which rocked the US economy leading to unprecedented global recession. It was informed that when the production was speaking in July- August 2008, the target plans went awry because of the global melt down & the business could never pick up thereafter. 3.4 Hedging is defined as 'To enter into transactions that will protect against loss through a compensatory price movement'. A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate. Any person having an exposure to the foreign currency may resort to hedging in the course of his manufacturing business to guard against the loss through future price fluctuations in respect of his contracts for the actual delivery of goods. 3.5 On the question raised by me regarding the reason for claiming the losses in the A.Y. 2011-12 & not in the previous two years, the counsel referred to the te....
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....out trigger whenever there was an accumulation of 40 pts. (AIV) i.e. wherever the reference rate on each expiry date exceeded the strike rate, then the excess of the reference rate over the spot rate was to be accumulated for all the expiry dates & the contract was knockedoff if the sum total of the AIV was accumulated to a figure of 40 & above. The above clauses indicate that the notional loss incurred on each expiry date was to be converted into a actual loss only if none of the conditions specified above were achieved in the balance period of the contract. They clearly specify that the losses could not be claimed by the assessee on accrual basis in the previous years as they were to be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the assessee. The terms of the Target redemption forward contracts enabled the assessee to wait for the occurrence or non-occurrence of the aforesaid two events in the future to avoid / nullify the notional losses incurred at each expiry date. In the first year of the contracts the assessee had earned crystallized profit of Rs. 62 Lacs in the F.Y. 2008-09 which was du....
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....ranteed procurement cannot alone be held as a vitiating factor when the agreements are examined from a complete perspective. An adverse factual assumption is possible only after assimilation of the entire facts & cannot be drawn on the basis of piecemeal appreciation of the evidence. 3.7 The conclusion of the Assessing Officer that the hedging is not on the basis of JPY export receivables as the contract with the bankers was based on USD-JPY exchange rate & not on the JPY-INR exchange rate is indicative of the absence of the understanding of the working mechanism of the foreign exchange market. As explained in the note issued by the Standard Chartered Bank, the USD is known as currency major in the Fx market which trades in few select currency pairs. The currency pairs in which the forwards contracts were available at the time of entering the contracts did not consist of INR as one of the currencies. Accordingly the contract in USD-JPY was offered by the bankers to the assessee. As explained by the bank the real currency pairs traded in Fx market are USD-JPY. The JPY-INR rate is nothing but a mathematical derivation of two rates & is not a traded rate. In fact, INR is stat....
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....edging of export receivables. In my view there is no requirement of correlation of the value of the actual exports with the contractual obligations agreed in the forward contracts. The facts & circumstances explained in the submissions buttress the reasons for nonachievement of the anticipated export turnover due to the unprecedented global melt down starting from Sep. 2008 due to the crash of the biggest investment banker M/s Lehmann Brothers in US. 3.9 The Assessing Officer has also examined the claim of the loss under the provisions of Sec. 43(5) of the Act. It has been concluded that the assessee has not entered into any forward contract for raw material or merchandise, & to the contrary, the forward contracts with the bankers are for the moneys to be paid or received, without actual delivery of the foreign exchange depending upon the prevailing USD-JPY exchange rate with reference to base rate. Therefore the transaction is held to be a speculative transaction & loss arising there from is held to be a speculation loss & accordingly disallowed. The assessee has relied on various case laws. The relevant extracts from the cited judgements are reproduced to unders....
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....contracts could not be honored by the assessee for which it had to pay Rs. 13.50 lakhs, which was debited to the profit and loss account. The assessee claimed the same as business loss. The Assessing Officer held that the loss was not deductible as a business loss as it was incurred in a speculative transaction. The Tribunal held that it was a business loss. On further appeal to the High Court: Held, dismissing the appeal, that the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs. 13.50 lakhs as a business loss." Moreover the High Court of Bombay very recently in the case of CIT Vs Vishindas Holaram reported in 50 Taxmann.com 337 has held as under:- "Section 43(5) of the Income Tax Act 1961- Speculative transactions (Meaning of) Whether once main business of assessee is Assessment year 2003-04 identified, if some incidental a....
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....ement of the contracts by way of delivery of the difference is not relevant. The relevant issue to be considered is that whether the transactions can be deemed to be incidental to its business & have a direct nexus with the existing export orders. The Hon'ble Supreme Court in the case of Ramchander Shivnarayan Vs CIT reported in 111 ITR 263, has observed that "If there is a direct & proximate nexus between the business operation & the loss or it is incidental to it, then the loss is deductible, as without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard, such a loss is considered to be a trading one & becomes deductible from the total income, although in terms of neither the 1922 Act nor in the 1961 Act, there is a provision". The foreign forward contracts entered cannot be considered in isolation as the assessee is not a trader of the foreign currency. The banks could not entertain contracts of speculative nature as per the RBI regulations. The contracts could have been offered only to the exporters like the assessee for the purpose of hedging only. I am of the considered opinion that th....
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....tility in the foreign currency due to global meltdown from the F.Y 2008-09; g) The contracts were entered into based on scientific analysis and past history. h) The assessee had taken a very conservative and calculated risk while finalising the terms of the forward contract; i) When exports commenced as per the scheduled target dates and was expected to increase the biggest investment collapse through Lehmann Brothers in September 2008 occurred rocking the US economy and leading to an unprecedented global recession; j) None of the economies could constitute an exception to this global meltdown. k) These forward contracts met both the commercial standards and the regulatory requirements of the RBI. It is mandatory under the RBI regulations and master circulars that forward contracts are permissible only on the strength of prudent, commercial underlying transactions; 1) The company had entered into forward contracts only with reputed banks which is mandated to follow the statutory norms and obligations; m) The assessee was the actual user of the forward contracts and not trading in foreign currency derivatives which were ....
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....ss incurred thereon, on account of exchange fluctuation need to be construed as speculative in nature, thereby not eligible to be set off against the business income. During the course of hearing, the bench directed the Learned AR to produce the financial statements of the assessee company and also complete details of the forward contracts with supporting documents. The same were duly furnished by the Learned AR in subsequent hearing and Learned DR was granted sufficient time to rebut the same. On perusal of the additional paper book filed by the Learned AR at the behest of the Bench containing the audited financial statements of the assessee company for the year under consideration and the complete details of hedging contracts with facts and figures and supporting evidences thereon, we find that assessee had reported total turnover of Rs 407.98 crores from manufacturing activity of automotive goods, moulds, dyes and tools and Rs 9.30 crores of trading of mould, dyes and tools in its audited financial statements. Out of the aforesaid revenue, export sales amount to Rs 13.07 crores in manufacturing activity and Rs 2.92 crores in trading activity. The assessee has furnished the compl....
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.... 23,90,549 6,54,40,746 1,26,799 20,83,170 4,14,64,084 1.09,415 16.60,901 6,62,14,800 77 530 19,39,272 66,04,800 83,248 12. We find that the revenue had sought to dispute the export exposure of the assessee in Japanese Yen alone in the instant case. The rationale for assessee entering into hedging contracts in view of its export exposure has already been explained in detail in the table depicted in the earlier part of this order. We find that the argument of the revenue that automobile business transactions of the assessee are in lakhs whereas the hedging contract of export receivables are in crores is to be dismissed as devoid of merit as it is not supported by the facts and figures depicted in the financial statements of the assessee company. Further, the assessee had declared exchange gains from these hedging contracts in the earlier year which has been taxed as business income by the revenue. Merely because there is a loss arising on hedging contracts during the year under consideration, the same cannot be treated as speculative in nature by taking a divergent stand. Further it is pertinent to note that the assessee is not engaged in trading o....