STERLITE TECHNOLOGIES LTD, PUNE V. CIT LTU 1, MUMBAI

ITA 4020/MUM/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6953 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2012-2013
• Appeal Filed On: 02-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJUNATH SWAMY
• Assessee Lawyers: B V JHAVERIAR
• Keywords: Capital asset; Transfer pricing; Question of law; Revised return
• Section: 263

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL EBENCH M UMBAI , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & PAWAN SINGH, JUDICIAL MEMBER ./ITA/4020/MUM/2017, /ASSESSMENT YEAR: 2012-13 STERLITE TECHNOLOGIES LIMITED 4 TH FLOOR, GODREJ MILLENIUM 9, KOREGAON PARK, PUNE-411 001. PAN:AAECS 8719 B VS. DCIT-(LTU)-1 29 TH CENTRE NO.1, WORLD TRADE CENTRE CUFFE PARADE MUMBAI-400 005. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI MANJUNATH SWAMY (CIT-DR) ASSESSEE BY: SHRI B.V. JHAVERI-AR / DATE OF HEARING:09/04/2018 / DATE OF PRONOUNCEMENT: 23/05/2018 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , - PER RAJENDRA, AM - CHALLENGING THE ORDER OF THE COMMISSIONER OF INCOME TAX (LTU),DATED 29/03/2017, PASSED U/S.263 OF THE ACT,THE ASSESSEE HAS FILED THE PRESE NT APPEAL. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALES OF OPTICAL FIBRE, OPTICAL FIBRE CABLES AND POWER CONNECTORS,FILED ITS RETURN OF INCOME ON 24/11/201 DECLARING ITS INCOME AT RS. NIL. BOOK PROFIT WAS COMPUTED AT RS. 96.09 CRORES, AS PER THE PROVISIONS OF SECTION 115 JB OF THE ACT. LATER ON,A REVISED RETURN WAS FILED ON 29/03/2014 W HERE TOTAL INCOME UNDER THE NORMAL PROVISIONS AND THE MAT PROVISIONS REMAINED THE SAME .THE ASSESSING OFFICER (AO) COMPLETED THE ASSESSMENT U/S. 143(3)ON 14/01/2015,D ETERMINING THE INCOME OF THE ASSESSEE AT RS. NIL UNDER THE NORMAL PROVISIONS.HE CALCULATED B OOK PROFIT AT RS. 96.45 CRORES U/S.115 JB OF THE ACT AND DETERMINED THE TAX PAYABLE BY THE AS SESSEE AT RS. 17.84 CRORES. 2. AFTER GOING THROUGH THE RECORDS, THE CIT WAS OF THE OPINION THAT THE ORDER PASSED BY THE AO WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF RE VENUE. HE ISSUED A NOTICE U/S. 263 OF THE ACT ON THREE COUNTS.VIDE ITS REPLY,DATED 15/12/2016 , THE ASSESSEE FILED DETAILED REPLY IN THAT REGARD.THE CIT DROPPED THE REVISIONARY PROCEEDINGS ON ONE OF THE GROUNDS. 3. FIRST EFFECTIVE GROUND OF APPEAL(GOA-2)IS ABOUT FOR EIGN EXCHNAGE(FE)LOSS.WITH REGARD AND UNREALISED EXCHANGE LOSS ON PURCHASE OF ASSETS OF RS. 10.3 CRORES, THE CIT OBSERVED THAT 4020/M/17-STERLITE TECHNOLOGIES 2 WHILE COMPUTING THE INCOME UNDER THE ACT ANY DEVIAT ION OF ACCOUNTING STANDARD FROM THE PROVISIONS OF THE ACT HAD TO BE FACTORED. HE MADE A REFERENCE TO THE PROVISIONS OF SECTION 43 A AND OBSERVED THAT SAME DEALT WITH THE RATE OF EXC HANGE OF CURRENCY AND THE TREATMENT TO BE GIVEN FOR FLUCTUATION IN FOREIGN EXCHANGE TRANSACTI ONS, THAT PROVISIONS OF THE ACT HAD TO BE APPLIED WHILE COMPUTING THE INCOME OF AN ASSESSEE I RRESPECTIVE OF THE MANDATE OF THE ACCOUNTING STANDARDS. HE REFERRED TO THE INSTRUCTIO N NO.3 OF 2010, ISSUED BY THE CBDT, WHEREIN THE JUDGMENT OF WOODWARD GOVERNER INDIA PRI VATE LTD.WAS CONSIDERED. HE HELD THAT SAID INSTRUCTION WAS BINDING ON THE DEPARTMENTAL AU THORITIES. HE DIRECTED THE AO TO RE- COMPUTE THE INCOME OF THE ASSESSEE BY DISALLOWING N OTIONAL LOSS RESULTING FROM THE STATEMENT OF OUTSTANDING LIABILITIES/RECEIVABLES. 4. BEFORE US,THE AUTHORISED REPRESENTATIVE (AR) STATED THAT AS PER THE ACCOUNTING POLICY FOLLOWED AND RECORDED BY THE ASSESSEE IN THE NOTES TO FINANCIAL STATEMENTS ALL FOREIGN CURRENCY MONETARY ITEMS WERE TRANSLATED USING EXCHANGE RATE PREVAILING AS ON 31/03/2012, THAT THE AMENDED SECTION 43A STIPULATED THAT FACTUAL PAYMENT OF THE DECREASE/AND ASKED LIABILITY WAS A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CA RRYING COST OF THE FIXED ASSETS, THAT FOLLOWING THE ACCOUNTING STANDARDS (AS)11,THAT THE ASSESSEE RESTATED ITS LIABILITY FOR PURCHASE OF ASSETS IN FOREIGN CURRENCY AT THE FE RATE PREVAI LING ON THE LAST DATE OF MARCH, 2012, THAT THE ASSESSEE HAD INCREASED THE THAT LIABILITY BY A SUM OF RS. 10,33,11,458/-, THAT THE LIABILITY WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT,THAT LIABILI TY IN QUESTION WAS DISALLOWED BY THE ASSESSEE ITSELF AS IT HAD NOT PAID THE LIABILITY TILL 31/03/ 2012, THAT THE CIT DIRECTED THE AO TO DISALLOW THE LOSS WHILE COMPUTING THE BOOK PROFIT ON THE GRO UND THAT IT WAS CONTINGENT IN NATURE,THAT THE LOSS WAS NOT CONTINGENT, THAT IT WAS ACTUAL LOS S AS PER THE PREVAILING FOREIGN EXCHANGE RATE ON LAST DAY OF THE RELEVANT FINANCIAL YEAR.HE RELIE D UPON THE CASES OF BHARAT SERUMS AND VACCINES LTD. (ITA 3091 AND 3375/ MUMBAI/2012,DATED 15/02/2017), HALDIA PETROCHEMICALS LTD. (70 TAXMANN. COM.70)VINERGY INTERNATIONAL PRIV ATE LTD.(INCOME TAX APPEAL NUMBER 376 OF 2014,DATED 11/08/2016 OF HONORABLE BOMBAY HIGH C OURT)AND D CHETAN AND CO. (390 ITR 36).THE DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE CIT AND STATED THAT HE HAD RIGHTLY APPLIED THE INSTRUCTION NUMBER THREE OF 2010. 5 .WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERSUED TH E MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE HAD ADDED BACK UNREALISED EXCHANGE LOSS ON PURCHASE OF ASSETS OF RS.10.3 CRORES TO THE INCOME CHARGEABLE TO TAX UNDER NORMAL PROVISION S OF THE ACT,THAT IT HAD CLAIM ANY UNREALISED EXCHANGE GAIN,THAT THE PROVISION FOR FE LOSS WAS REQUIRED TO BE DISALLOWED AND ADDED TO BOOK PROFIT.IN OUR OPINION,THE LOSS ON ACC OUNT OF A FE FLUCTUATION WAS NOT A 4020/M/17-STERLITE TECHNOLOGIES 3 CONTINGENT LOSS,AS HELD BY THE CIT.THE LOSS WAS NOT ARISING OUT OF ANY SPECULATIVE BUSINESS.THE FE LOSS WAS DUE TO PURCHASE OF CAPITAL ASSET AND SAME WAS NOT CLAIMED BY THE ASSESSEE WHILE COMPUTING THE INCOME UNDER THE NORMA L PROVISIONS OF THE ACT.WE FIND THAT SIMILAR QUESTION HAS BEEN DEALT BY THE TRIBUNAL IN THE CASE OF BHARAT SERUMS AND VACCINES LTD. (SUPRA). WE ARE REPRODUCING THE RELEVANT PORTI ON OF THE ABOVE ORDER OF THE TRIBUNAL AND IT READS AS UNDER: 4. SECOND GROUND DEALS WITH UPHOLDING THE DISALLOWANCE OF RS.4.74 CRORES BEING LOSS INCURRED DUE TO REVALUATION OF OPEN FORWARD EXCHANGE CONTRAC T.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO DERIVATIVE AGREEMENT TO SWAP TERM LOANS TAKEN IN RS. AGAINST FOREIGN CURRENCY,THAT IT HAD DEBITED MARKE D TO MARKET LOSSES OF RS.4,74, 24,891/- TO THE P&L A/C.STATING THAT THE SAID LIABILITY HAD CRYSTAL LIED OWING TO THE REVALUATION. THE AO CALLED FOR DETAILS ABOUT THE TRANSACTION. AFTER CONSIDERING TH E SAME HE HELD THAT IT HAD ENTERED INTO DERIVATIVE TRANSACTION BY SWAPPING THE LOAN, THAT T HE LIABILITY WAS PAID IN THE SUBSEQUENT YEAR,THAT THE NOTIONAL LOSS OF RS.4.74 CRORES COULD NOT BE AL LOWED. HE REFERRED TO INSTRUCTION OF CBDT DT.23/3/2010 AND ADDED THE DISPUTED AMOUNT TO THE T OTAL INCOME OF THE ASSESSEE. HE FURTHER HELD THAT IT WAS PROVISION AND NOT AN ASCERTAINED LIABIL ITY, AS SPECIFIED IN EXPLANATION 1 TO CLAUSE (C) TO THE PROVISIONS OF SECTION 115JB. THEREFORE, HE ADDE D RS.4.74 CRORES TO THE BOOK PROFIT OF THE ASSESSEE. 4.1. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, T HE FAA HELD THAT THE ASSESSEE HAD BORROWED FUNDS IN FOREIGN CURRENCY, THAT IN ORDER T O HEDGE AGAINST THE EXCHANGE FLUCTUATION IT HAD ENTERED INTO FOREIGN CURRENCY SWAP AGREEMENTS, THAT THE CONTRACTS WERE OF ONE YEAR, THAT THE LOSS CLAIMED BY THE ASSESSEE COULD NOT BE ALLOWED FOR T HE YEAR UNDER CONSIDERATION, THAT IT WAS A NOTIONAL /CONTINGENT LOSS, THAT IT WAS ALLOWED IN T HE NEXT ASSESSMENT YEAR. 4.2. BEFORE US,THE AR RELIED UPON THE CASE OF M/S. D.CH ETAN & CO.(INCOME TAX APPEAL NO. 278 OF 2014 DT.1/10/2016); WOODWARD GOVERNOR INDIA PVT. LT D.(312ITR254); OIL AND NATURAL GAS CORPORATION LTD.(322ITR18).THE DR SUPPORTED THE ORD ER OF THE FAA. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THE AVAILABLE MATERIAL. WE FIND THAT IN THE CASE OF M/S.D.CHETAN & CO. THE HON'BLE BOMBAY H IGH COURT HAD CONSIDERED THE FOLLOWING QUESTION OF LAW: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN DELETING THE ADDITION OF MAR TO MARKE TLOSS OF RS.78.10,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF LOS S ON FOREIGN EXCHANGE FORWARD CONTRACT LOSS AND NOT APPRECIATING THE FACT THAT THE SAID LO SS WAS A NOTIONAL LOSS AND HENCE CANNOT BE ALLOWED? IT WAS HELD BY THE HON'BLE BOMBAY HIGH COURT THAT Q UESTION FORMULATED BY THE DEPARTMENT DID NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. CONSIDERING THE ABOVE,WE DECIDE SECOND GROUND OF AP PEAL IN FAVOUR OF THE ASSESSEE. WE WOULD ALSO LIKE TO RELY UPON THE CASE OF D. CHET AN AND CO.(SUPRA).IN THAT MATTER,THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF IMPORT AND EXPORT OF DIAMONDS. FOR THE AY.2009-10, THE ASSESSEE EXPLAINED THAT THE AMOUNT OF RS.78.10 LAKHS CLAIMED AS LOSS WAS ON ACCOUNT OF HEDGING TRANSACTIONS ENTERED INTO TO SAFEGUARD VARI ATION IN EXCHANGE RATES AFFECTING ITS TRANSACTIONS OF IMPORT AND EXPORT.THE AO DISALLOWED THE CLAIM ON THE GROUND THAT IT WAS A NOTIONAL LOSS OF A CONTINGENT LIABILITY DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE FIRST APPELLATE AUTHORITY ALLOWED THE LOSS INCURRED ON TH E FORWARD CONTRACTS AS A BUSINESS LOSS. THE 4020/M/17-STERLITE TECHNOLOGIES 4 TRIBUNAL CONFIRMED THIS. ON APPEAL TO THE HONORABLE HIGH COURT, THE MATTER WAS DECIDED AS UNDER: THE TRIBUNAL CONCLUDED THAT THE TRANSACTION ENT ERED INTO BY THE ASSESSEE WAS NOT IN THE NATURE OF SPECULATIVE ACTIVITIES. FURTHER THE HEDGING TRANSAC TIONS WERE ENTERED INTO SO AS TO COVER VARIATION IN FOREIGN EXCHANGE RATE WHICH WOULD IMPACT ITS BUSINESS OF IM PORT AND EXPORT OF DIAMONDS. THESE CONCURRENT FINDINGS OF FACT WERE NOT SHOWN TO BE PERVERSE IN A NY MANNER. THE ASSESSING OFFICER IN THE ASSESSMENT ORDER DID NOT FIND THAT THE TRANSACTION ENTERED INT O BY THE ASSESSEE WAS SPECULATIVE IN NATURE. AT NO POINT OF TIME DID THE DEPARTMENT CHALLENGE THE ASSERTION OF THE ASSESSEE THAT THE ACTIVITY OF ENTERING INTO FOR WARD CONTRACT WAS IN THE REGULAR COURSE OF ITS BUSINESS ONLY TO SAFEGUARD AGAINST THE LOSS ON ACCOUNT OF FO REIGN EXCHANGE VARIATION. THE DEPARTMENT NEVER CONTENDED THAT THE TRANSACTION WAS SPECULATIVE BUT ONLY DISALLOWED ON THE GROUND THAT IT WAS NOTIONAL. THUS , IT WAS TO BE CONCLUDED THAT THE TRANSACTIONS ENTE RED WERE ONLY IN REGULAR COURSE OF BUSINESS AND NOT SPE CULATIVE. THEREFORE NO SUBSTANTIAL QUESTION OF LAW AROSE. FINALLY, WE WOULD LIKE TO REFER TO JUDGMENT OF THE HONORABLE BOMBAY HIGH COURT, DELIVERED IN THE CASE OF VINERGY INTERNATIONAL PRIVATE LTD. ( SUPRA) WHEREIN THE HONORABLE COURT HAS HELD AS UNDER: 5. THE GRIEVANCE OF THE REVENUE BEFORE US IS THAT INSTRUCTION NO. 3 OF 2010 DATED 31 ST MARCH 2010 ISSUED BY THE CBDT IN RESPECT OF LOSS ON ACCOU NT OF FOREIGN EXCHANGE DERIVATIVES IS SUBSEQUENT TO THE APEX COURTS DECISION IN WOODWARD GOVERNER INDIA PRIVATE LTD. (SUPRA) AND WAS NOT CONSIDERED BY THE TRIBUNAL. THE INSTRUCTION ACCORDING TO THE REVENUE WOULD GOVERN THE ISSUE. 6. IN THE PRESENT FACTS, WE FIND THAT LOSS WAS NOT ON ACCOUNT OF DERIVATIVES BUT ARE IN FACT LOSSES AND GAINS IN FOREIGN EXCHANGE RELATING TO PURCHASE AND SALE TRANSACTIONS I.E. CREDITORS AND DEBTORS OUTSTANDING AS ON 31 ST OF MARCH, 2010. THEREFORE, THE INSTRUCTION NO. 3 O F 2010 ISSUED BY CBDT WOULD HAVE NO APPLICATION TO THE FACTS OF THE PRESENT CASE. IN FACT THE ISSUE ARISING YEAR IN WOULD BE COVERED BY THE PRINCIPLE LAID DOWN BY THE APEX COURT IN WOODWARD GOVERNER INDIA PRIVATE LTD. (SUPRA). CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT OR DER OF THE AO IS NEITHER ERRONEOUS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE.WE FURTH ER HOLD THAT THE LOSS IS NOT OF CONTINGENT NATURE AND THE DIRECTION OF THE CIT IS CONTRARY TO THE DECISION OF THE HON'BLE SUPREME COURT DELIVERED IN THE CASE OF IN WOODWARD GOVERNOR INDIA PRIVATE LTD. (SUPRA). ACCORDINGLY, WE ALLOW SECOND GROUND OF APPEAL. 6. NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF PROD UCTION U/S. 80 IC IN RESPECT OF VOLUNTARY TRANSFER PRICING ADJUSTMENT UNDERTAKEN BY THE ASSESSEE, INVOKING THE PROVISIONS OF SECTION 92C(4) IS OF THE ACT.IN THE REVISIONARY PRO CEEDINGS,THE CIT HELD THAT THE MOMENT AN ASSESSEE SUFFERS FROM AN ADJUSTMENT PROPOSED BY THE TPO WHICH WAS HIGHER THAN ITS VOLUNTARY ADJUSTMENT OFFER THE PROVISIO TO SUB SECT ION 4 OF SECTION 92(C)OF THE ACT WOULD TRIGGER,THAT IN THAT SITUATION THERE WOULD NOT BE A NY DISTINCTION BETWEEN ELIGIBLE AND NON ELIGIBLE UNITS.HE DIRECTED THE AO TO WITHDRAW THE D EDUCTION UNDER CHAPTER VIA OF THE ACT. 7. BEFORE US,THE AR STATED THAT THERE WAS NO LOSS TO R EVENUE EVEN IF THE DISALLOWANCE WAS MADE OF RS.9.86 LAKHS,THAT THE ORDER OF THE AO WAS NOT PREJUDICIAL TO THE INTEREST OF REVENUE. ALTERNATIVELY,IT WAS ARGUED THAT THE DEDUCTION U/S. 80 IC WAS IN RESPECT OF POWER TRANSMISSION 4020/M/17-STERLITE TECHNOLOGIES 5 DIVISION OF THE ASSESSEE WHEREAS THE VOLUNTARY TRAN SGRESSING ADJUSTMENT WAS MADE IN RESPECT OF TELECOM DIVISION FOR WHICH DEDUCTION U/S. 80 IC WAS NOT CLAIMED. 7.1. IT WAS BROUGHT OVER NOTICE THAT IN PURSUANCE OF THE DIRECTIONS OF THE CIT THE AO PASSED THE ORDER U/S.143(3)R.W.S.263 OF THE ACT ON 19/06/ 2017,WHEREIN DEDUCTION UNDER CHAPTER VIA, IN RESPECT OF VOLUNTARY TRANSFER PRICING ADJUS TMENT OF RS. 9.86 LAKHS, WERE WITHDRAWN. IT WAS STATED THAT WHILE COMPUTING THE INCOME UNDER TH E NORMAL PROVISIONS, THE AO HAD DETERMINED THE INCOME OF THE ASSESSEE AT RS. NIL. T HE COMPUTATION OF BOOK PROFIT U/S. 115 JB WAS MADE AS FOLLOW: PARTICULARS RS. BOOK PROFIT AS PER ORDER U/S.143(3) DATED 14.01.2015 96,45,56,585 ADD: DISALLOWANCE AS PER PARA 4 10,33,11,458 TOTAL BOOK PROFIT 106,78,68,043 TAX @ 18.50% 19,75,55,588 AFTER CONSIDERING THE ABOVE COMPUTATION OF TOTAL IN COME UNDER THE NORMAL PROVISIONS AND THE MAT PROVISIONS,WE FIND THAT THE ORDER OF THE AO WAS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE,AS DISALLOWANCE OF DEDUCTION U/S. 80 IC TO THE EXTENT OF RS. 9,86, 657/-DID NOT AFFECT THE TAX CALCULATION.THEREFORE,WE DECIDE THE THIRD G ROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. WE ARE NOT DELIBERATING UPON THE ALTERNATIVE SUBMIS SIONS MADE BY THE ASSESSEE. AS A RESULT,APPEAL FI LED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED I N THE OPEN COURT ON 23 RD MAY, 2018. 23 , 2018 SD/- SD/- ( ( ( ( /PAWAN SINGH) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 23 .05.2018. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR E BENCH, ITAT, MUMBAI / , , . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.