Soma Textiles & Industries Ltd., Ahmedabad V. The Addl.CIT, Range-8, Ahmedabad

ITA 472/AHD/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6235 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 16-01-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 12-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN SHARMA HEARING CONCLUDED
• Assessee Lawyers: G C PIPARA
• Keywords: Transfer pricing; International transaction; Source of fund; Wholly owned subsidiary; Speculation loss; Revenue expenditure; Capital expenditure
• Section: 37(1); 43(5)

Judgement Text

ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND RAJPAL YADAV JM] ITA NO. 472 /AHD/201 4 ASSESSMENT Y EAR : 20 0 8 - 09 SOMA TEXTILES & INDUSTRIES LTD., ..... .......... .APPELLANT RAKHIAL ROAD, AHMEDA BAD 380 001. [PAN: AADCS 0405 R] VS. ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE - 8 , AHMEDABAD. .. ......... RESPONDENT APPEARANCES BY G.C. PIPARA FOR THE A PPELLANT SUMAN SHARMA FOR THE R E SPONDENT HEARING CONCLUDED ON: 1 9 .0 1.2017 ORDER PRONOUNCED ON : 11 . 0 4 .2017 O R D E R PER PRAMOD KUMAR , AM: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HAS CHALLENGED CORRECTNESS OF LEARNED CIT(A) S ORDER DATED 26.1 1 .201 3 PASSED BY THE LEARNED CIT(A) , IN THE MATTER OF A SSESSMENT UNDER SECTION 143( 3 ) OF THE I NCOME TAX ACT 1961, FOR THE ASSESSMENT YEAR 20 07 - 08 . 2. IN GROUND NOS. 1, 2 AND 3 , WHICH WE WILL TAKE UP TOGETHER, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCES: 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS IN DISMISSING THE APPELLANT S GROUND CHALLENGING THE ORDER U/S.143(3) R.W.S 144C(1) OF THE ACT MORE PARTICULARLY THE ACTION OF THE AO IN REFERRING THE CASE TO A D DL. CIT (TRANSFER PRICING), AHMEDABAD FOR COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO ALLEGED INTERNATIONAL TRANSACTION WITH SOMA TEXTILE FZE, A 100% SUBSIDIARY OF THE APPELLANT COMPANY. IN VIEW OF ELABORATE FACTS AND SUBMISSIONS FILED, THE PROVISIONS OF TRANSFER PRICING ARE NOT APPLICABLE TO THE APPELLANT COMPANY AND IT BE HELD SO. ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 2 OF 11 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS.3,34,28,873/ - MADE BY THE AO ON ACCOUNT OF ARMS LENGTH PRICE OF LOAN INTEREST WHILE RELYING UPON THE FINDINGS OF THE ADDL. CIT (TPO). IN VIEW OF ELABORATE FACTS AND SUBMISS IONS FILED, MORE PARTICULARLY KEEPING IN VIEW THE FACT THAT THE AMOUNT GIVEN TO SOMA TEXTILES, FZE NOT BEING A LOAN BUT MERELY CONTRIBUTION TOWARDS CAPITAL AND/OR QUASI EQUITY CAPITAL OF THE SAID SUBSIDIARY, THE O R DER OF THE A D DL. CIT (TPO) IS BAD IN LAW A ND CONSEQUENTLY THE IMPUGNED ADDITION OF RS.3,34,28,873/ - BEING BASED ON THE SAID ORDER ALSO REQUIRES TO BE DELETED. 3. THE LEARNED CIT(A) HAS FURTHER ERRED IN CONFIRMING THE ABOVE ADDITION MADE BY THE ASSESSING OFFICER BY CHARGING INTEREST @ 8.7% WHICH IS CONTRARY TO DEPARTMENT S OWN STAND ON IDENTICAL FACTS IN PREVIOUS YEAR I.E. A.Y. 2007 - 08 VIDE ORDER U/S. 92CA(3) OF THE ACT WHEREIN ARM S LENGTH PRICE IN RELATION TO TRANSACTION OF ADVANCES BY APPELLANT COMPANY TO SOMA TEXTILE FZE WAS DETERMINED BY APPL YING LIBOR+2% RATES, WHICH WAS ALSO INITIALLY PROPOSED TO BE ADOPTED IN THE YEAR UNDER DISPUTE ALSO. THUS, IN ABSENCE OF ANY CHANGE IN FACTS DURING THE YEAR UNDER CONSIDERATION VIS - - VIS A.Y. 2007 - 08, ADOPTION OF A DIFFERENT RATE IS WHOLLY UNJUSTIFIED AND BAD IN LAW, WITHOUT PREJUDICE TO THE FACT THAT EVEN THE LIBOR+2% RATE APPLIED IN PREVIOUS YEAR HAS BEEN DISPUTED BY THE APPELLANT COMPANY 3. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THESE ISSUES ARE COVERED AGAINST THE ASSESSEE IN PRINCIPLE BUT IN FAVO UR OF THE ASSESSEE ON QUANTUM OF ALP ADJUSTMENT , BY DECISION OF A COORDINATE BENCH OF THIS TRIBUNAL, IN THE ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2007 - 08 - ALSO REPORTED AS [(2015) 154 ITD 745 (AHD)], WHEREIN THE COORDINATE BENCH HAS, INTER ALIA, CO NCLUDED AS FOLLOWS: 5. AS LEARNED COUNSEL FOR THE ASSESSEE RIGHTLY POINTS OUT, SO FAR AS PEROT SYSTEM S CASE (SUPRA) IS CONCERNED, THE ARGUMENT OF LOAN BEING IN QUASI CAPITAL WAS REJECTED ON FACTS, THOUGH THE CORE LEGAL ISSUE, I.E. WHETHER ALP ADJUSTMENTS WILL ALSO BE WARRANTED IN CASE OF INTEREST FREE LOANS EXTENDED AS QUASI CAPITAL, WAS LEFT OPEN. IT WAS STATED SO IN THE CASE OF MICRO INKS LTD VS ACIT [(2013) 157 TTJ 289 (AHD)]. THE QUESTION, HOWEVER, ARISES AS TO WHAT ARE THE CONNOTATIONS OF EXPRESSION QUASI CAPITAL IN THE CONTEXT OF THE TRANSFER PRICING LEGISLATION. 6. HON BLE DELHI HIGH COURT, IN THE CASE CHRYSCAPITAL INVESTMENT ADVISORS INDIA LTD VS ACIT [(2015) 56 TAXMANN.COM 417 (DELHI)], HAS BEGUN BY QUOTING THE THOUGHT PROVOKING WORDS OF JUSTICE FELIX FRANKFURTER TO THE EFFECT THAT A PHRASE BEGINS LIFE AS A LITERARY EXPRESSION; ITS FELICITY LEADS TO ITS LAZY REPETITION; AND REPETITION SOON ESTABLISHES IT AS A LEGAL FORMULA, UNDISCRIMINATINGLY USED TO EXPRESS DIFFERENT AND SOMETIMES CONTRADICTORY IDEAS'. THE REFERENCE SO MADE TO THE WORDS OF JUSTICE FRANKFURTER WAS IN THE CONTEXT OF THE CONCEPT OF SUPER PROFITS BUT IT IS EQUALLY VALID IN THE CONTEXT OF CONCEPT OF QUASI CAPITAL ALSO. AS IN THE CASE OF THE SUPER PROFITS, TO QUOTE THE WORDS OF TH EIR LORDSHIPS, MANY DECISIONS OF DIFFERENT BENCHES OF THE ITAT INDICATE A ROTE REPETITION (IN THE WORDS OF FELIX FRANKFURTER J, QUOTED IN THE BEGINNING OF THIS JUDGMENT A 'LAZY REPETITION') OF THIS REASONING, WITHOUT AN INDEPENDENT ANALYSIS OF THE PROVISI ONS OF THE ACT AND THE RULES , ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 3 OF 11 THE SAME SEEMS TO BE THE POSITION WITH REGARD TO QUASI CAPITAL . THERE ARE SEVERAL DECISIONS OF THIS TRIBUNAL, INCLUDING IN THE CASES OF PEROT SYSTEMS TSI VS DCIT [(2010) 130 TTJ 685 (DEL)]., MICRO INKS LTD VS ACIT [(2013) 1 57 TTJ 289 (AHD)], FOUR SOFT PVT LTD VS DCIT [ (2014)149 ITD 732 (HYD)], PRITHVI INFORMATION SOLUTIONS PVT LTD VS ACIT [(2014) 34 ITR (TRI) 429 (HYD)] , WHICH REFER TO THE CONCEPT OF QUASI CAPITAL BUT NONE OF THESE DECISIONS THROWS ANY LIGHT ON WHAT CONS TITUTES QUASI CAPITAL IN THE CONTEXT OF TRANSFER PRICING AND ITS RELEVANCE IN ASCERTAINMENT OF THE ARM S LENGTH PRICE OF A TRANSACTION. LEST WE MAY ALSO END UP CONTRIBUTING TO, AS HON BLE DELHI HIGH COURT PUT IT, ROTE REPETITION OF THIS REASONING WITHOU T AN INDEPENDENT ANALYSIS OF THE PROVISIONS OF THE ACT AND THE RULES , LET US TAKE BRIEFLY DEAL WITH THE CONNOTATIONS OF QUASI CAPITAL , AND ITS RELEVANCE, UNDER TH E TRANSFER PRICING REGULATIONS. 7. THE RELEVANCE OF QUASI CAPITAL , SO FAR AS ALP DETERMI NATION UNDER THE TRANSFER PRICING REGULATION IS CONCERNED, IS FROM THE POINT OF VIEW OF COMPARABILITY OF A BORROWING TRANSACTION BETWEEN THE ASSOCIATED ENTERPRISES. 8. IT IS ONLY ELEMENTARY THAT WHEN IT COMES TO COMPARING THE BORROWING TRANSACTION BETWEEN THE ASSOCIATED ENTERPRISES, UNDER THE COMPARABLE UNCONTROLLED PRICE (I.E. CUP) METHOD, WHAT IS TO BE COMPARED IS A MATERIALLY SIMILAR TRANSACTION, AND THE ADJUSTMENTS ARE TO BE MADE FOR THE SIGNIFICANT VARIATIONS BETWEEN THE ACTUAL TRANSACTION WITH THE A E AND THE TRANSACTION IT IS BEING COMPARED WITH. UNDER RULE 10B(1)(A), AS A FIRST STEP, THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED, AND TH EN SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE O PE N MARKET. USUALLY LOAN TRANSACTIONS ARE BENCHMARKED ON THE BASIS OF INTEREST RATE APPLICABLE ON THE LOAN TRANSACTIONS SIMPLICTOR WHICH, UNDER THE TRANSFER PRICING REGULATIONS, CANNOT BE COMPARED WITH A TRANSACTION WHICH IS SOMETHING MATERIALLY DIFFERENT TH AN A LOAN SIMPLICTOR, FOR EXAMPLE, A NON - REFUNDABLE LOAN WHICH IS TO BE CONVERTED INTO EQUITY. IT IS IN THIS CONTEXT THAT THE LOANS, WHICH ARE IN THE NATURE OF QUASI CAPITAL, ARE TREATED DIFFERENTLY THAN THE NORMAL LOAN TRANSACTIONS. 9. THE EXPRESSION QUA SI CAPITAL , IN OUR HUMBLE UNDERSTANDING, IS RELEVANT FROM THE POINT OF VIEW OF HIGHLIGHTING THAT A QUASI - CAPITAL LOAN OR ADVANCE IS NOT A ROUTINE LOAN TRANSACTION SIMPLICTOR. THE SUBSTANTIVE REWARD FOR SUCH A LOAN TRANSACTION IS NOT INTEREST BUT OPPORTUNI TY TO OWN CAPITAL. AS A COROLLARY TO THIS POSITION, IN THE CASES OF QUASI CAPITAL LOANS OR ADVANCES, THE COMPARISON OF THE QUASI CAPITAL LOANS IS NOT WITH THE COMMERCIAL BORROWINGS BUT WITH THE LOANS OR ADVANCES WHICH ARE GIVEN IN THE SAME OR SIMILAR SITUA TIONS. IN ALL THE DECISIONS OF THE COORDINATE BENCHES, WHEREIN REFERENCES HAVE BEEN MADE TO THE ADVANCES BEING IN THE NATURE OF QUASI CAPITAL , THESE CASES REFERRED TO THE SITUATIONS IN WHICH (A) ADVANCES WERE MADE AS CAPITAL COULD NOT SUBSCRIBED TO DUE T O REGULATORY ISSUES AND THE ADVANCING OF LOANS WAS ONLY FOR THE PERIOD TILL THE SAME COULD BE CONVERTED INTO EQUITY, AND (B) ADVANCES WERE MADE FOR SUBSCRIBING TO THE CAPITAL BUT THE ISSUANCE OF SHARES WAS DELAYED, EVEN IF NOT INORDINATELY. CLEARLY, THE AD VANCES IN SUCH CIRCUMSTANCES WERE MATERIALLY DIFFERENT THAN TH E LOAN TRANSACTIONS SIMPLICITOR AND THAT IS WHAT WAS DECISIVE SO FAR AS DETERMINATION OF THE ARM S LENGTH PRICE OF SUCH TRANSACTIONS WAS CONCERNED. THE REWARD FOR TIME VALUE OF MONEY IN THESE C ASES WAS OPPORTUNITY TO SUBSCRIBE TO THE CAPITAL, UNLIKE IN A NORMAL LOAN TRANSACTION WHERE REWARD IS INTEREST, WHICH IS MEASURED AS A PERCENTAGE OF THE MONEY LOANED OR ADVANCED. 10. LEARNED COUNSEL WANTS TO TAKE THE CONCEPT OF QUASI CAPITAL TO A DIFFERE NT LEVEL NOW. HIS CONTENTION IS THAT WHENEVER IT CAN BE SAID THAT THE LOAN TRANSACTION IS IN THE NATURE OF QUASI CAPITAL, ITS ARM S LENGTH PRICE SHOULD BE NIL RATE OF INTEREST, AND TO DECIDE WHAT IS QUASI CAPITAL , HE REFERS TO THE ACADEMIC LITERATURE O N THE ISSUE. LEARNED COUNSEL HAS TAKEN PAINS TO EXPLAIN THAT THE GRANT OF LOAN WAS INTENDED TO BE A LONG TERM INVESTMENT IN ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 4 OF 11 THE SUBSIDIARY WHICH HAS A CRUCIAL ROLE TO PLAY IN ITS BUSINESS PLANS. HE SUBMITS THAT THE ARM S LENGTH PRICE OF THIS QUASI CAPITAL INVESTMENT BY THE ASSESSEE IN SOMA TEXTILES FZE SHOULD BE TREATED AT NIL . 11. WE ARE UNABLE TO SEE ANY MERITS IN HIS LINE OF REASONING. AS THE LEARNED COUNSEL HIMSELF ACCEPTS, ON A CONCEPTUAL NOTE, SEVERAL TYPES OF DEBTS, PARTICULARLY LONG TERM UNSECURED DEBTS, AND REVENUE PARTICIPATION INVESTMENTS COULD BE TERMED AS QUASI CAPITAL . SO FAR AS ARM S LENGTH PRICE OF SUCH TRANSACTIONS ARE CONCERNED, THIS CANNOT BE NIL BECAUSE, UNDER THE COMPARABLE UNCONTROLLED PRICE METHOD, SUCH OTHER TRANSACTIONS BETWEEN THE INDEPENDENT ENTERPRISES CANNOT BE AT NIL CONSIDERATION EITHER. NOBODY WOULD ADVANCE LOAN, IN ARM S LENGTH SITUATION, AT A NIL RATE OF INTEREST. THE COMPARABLE UNCONTROLLED PRICE OF QUASI CAPITAL LOAN, UNLESS IT IS ONLY FOR A TRANSITORY PERIOD AND TH E DE FACTO REWARD FOR THIS VALUE OF MONEY IS THE OPPORTUNITY FOR CAPITAL INVESTMENT OR SUCH OTHER BENEFIT, CANNOT BE NIL. AS FOR THE INTENT OF THE ASSESSEE TO TREAT THIS LOAN AS INVESTMENT, NOTHING TURNS ON IT EITHER. WHETHER ASSESSEE WANTED TO TREAT THIS LOAN AS AN INVESTMENT OR NOT DOES NOT MATTER SO FAR AS DETERMINATION OF ARM S LENGTH PRICE OF THIS LOAN IS CONCERNED; WHAT REALLY MATTERS IS WHETHER SUCH A LOAN TRANSACTION WOULD HAVE TAKEN PLACE, IN AN ARM S LENGTH SITUATION, WITHOUT ANY INTEREST BEING CH ARGED IN RESPECT OF THE SAME. AS FOR THE CONTENTION REGARDING CRUCIAL ROLE BEING PLAYED BY, OR VISUALIZED FOR, THIS AE, THERE IS NO MATERIAL ON RECORD TO DEMONSTRATE THE SAME OR TO JUSTIFY THAT EVEN IN AN ARM S LENGTH SITUATION, A ZERO INTEREST RATE LOAN W OULD HAVE BEEN JUSTIFIED TO SUCH AN ENTITY. A LOT OF EMPHASIS HAS ALSO BEEN PLACED ON THE FACT THAT THE LOAN WAS OUT OF THE GDR FUNDS, AND, FOR THIS REASON, THE INTEREST FREE LOAN WAS JUSTIFIED. WE ARE UNABLE TO SEE ANY LOGIC IN THIS EXPLANATION EITHER. EV EN WHEN THE LOAN IS GIVEN OUT OF THE GDR FUNDS HELD ABROAD, THE ARM S LENGTH PRICE OF THE LOAN IS TO BE ASCERTAINED. THE SOURCE OF FUNDS IS IMMATERIAL IN THE PRESENT CONTEXT. WE HAVE ALSO NOTED THAT THE ASSESSEE HAS NOT OFFERED ANY ASSISTANCE ON THE QUANTU M OF ALP ADJUSTMENT IN RESPECT OF THIS LOAN TRANSACTION, AND THAT IN THE SUBSEQUENT ASSESSMENT YEARS, THE ASSESSEE HIMSELF HAS ACCEPTED ALP ADJUSTMENT BY ADOPTING THE LIBOR + 2% INTEREST RATE. IN THIS VIEW OF THE MATTER, NO INTERFERENCE IS WAR RANTED ON THE QUANTUM OF THE ALP ADJUSTMENT EITHER. IN VIEW OF THESE DISCUSSIONS, WE CONFIRM THE STAND OF THE AUTHORITIES BELOW ON THIS ISSUE AND DECLINE TO INTERFERE IN THE MATTER. 12. GROUND N OS. 1 AND 2 ARE THUS DISMISSED. 4 . LEARNED REPRESENTATIVES FAIRLY ACCEPT TH AT THERE IS NO MATERIAL VARIATION IN THE FACTS AND CIRCUMSTANCES OF THE CASE, EXCEPT THAT, IN THIS ASSESSMENT YEAR AND AS AGAINST LIBOR PLUS 2% ADOPTED BY THE TPO HIMSELF AS ARM S LENGTH INTEREST, THE TPO HAS RECOMMENDED 8.6% AS ARM S LENGTH INTEREST. 5. THE JUSTIFICATION FOR THIS VARIATION IS GIVEN AS AN ADDITIONAL 2% IS HIGHER RISK IN LENDING TO THE SUBSIDIARY, AND IS JUSTIFIED AS TO GUARANTEE WHICH THE SUBSIDIARY WOULD HAVE REQUIRED FROM THE ASSESSEE. THE TPO HAS OBSERVED THAT EVEN IF THE SUBSIDIARY WA S TO OBTAIN THIS LOAN FROM THE BANK, IN ADDITION TO LIBOR PLUS 2%, THE ASSESSEE WOULD HAVE NEEDED A GUARANTEE FROM ITS PARENT COMPANY, AS THE SUBSIDIARY DOES NOT HAVE CREDIT RATING, AND THE EFFECTIVE BORROWING RATE WOULD THUS HAVE BEEN LIBOR+ 2% FOR BANK S MARGIN+ 2% FOR THE GUARANTEE FEES. AGGRIEVED, ASSESSEE CARRIED GRIEVANCE, INTER ALIA, AGAINST THIS EFFECTIVE MARGIN OF LIBOR PLUS 4% TO THE CIT(A), BUT WITHOUT ANY SUCCESS. THE CIT(A) CONFIRMED THE SAME ON THE GROUND THAT THE ALP OF CORPORATE GUARANTEE @ 2% IS FAIR AND REASONABLE. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL BEFORE US. 6. SO FAR AS THE ISSUE OF ALP ADJUSTMENT BEING REQUIRED, IN PRINCIPLE, IS CONCERNED, LEARNED COUNSEL FOR THE ASSESSEE HAS FAIRLY CONCEDED THAT THIS ISSUE MUST BE DECIDED ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 5 OF 11 AGAI NST THE ASSESSEE AT THIS FORUM, AND THAT HE WILL CARRY THE MATTER, IF SO ADVISED, IN FURTHER APPEAL BEFORE HON BLE COURTS ABOVE. GROUND NO. 1 AND 2, THEREFORE, HAVE TO BE DECIDED AGAINST THE ASSESSEE AND THE IMPUGNED ACTION OF THE AUTHORITIES BELOW, IN PRI NCIPLE, IS TO BE CONFIRMED. 7. COMING TO THE QUANTUM OF ADDITION, WE FIND THAT THE APPROACH ADOPTED BY THE AUTHORITIES BELOW IS NOT JUSTIFIED AND CANNOT MEET ANY JUDICIAL APPROVAL. THE ADJUSTMENT ON ACCOUNT OF GUARANTEE FEES, AS MADE BY THE TPO, IT IS WHOL LY UNWARRANTED AS NO SUCH GUARANTEE IS GIVEN AND, AS SUCH, THERE IS NO SUCH TRANSACTION FOR DETERMINATION OF ARM S LENGTH PRICE. IN ANY EVENT, AS REGARDS THE QUESTION AS TO WHETHER AN ADDITIONAL ARM S LENGTH PRICE ADJUSTMENT ON ACCOUNT OF HIGHER RISK OF L ENDING TO A LOW RATED SUBSIDIARY IS REQUIRED, THIS ISSUE IS NOW COVERED, IN FAVOUR OF THE ASSESSEE, BY A COORDINATE BENCH DECISION IN THE CASE OF UFO MOVIES INDIA LTD VS ACIT [(2016) 131 DTR 81 (DEL)] . THIS DECISION, INTER ALIA, OBSERVES AS FOLLOWS: 5. W E HAVE NOTED THAT THERE IS NO DISPUTE THAT THE LIBOR RATE, SO FAR AS THE RELEVANT PREVIOUS YEAR WAS CONCERNED, IS TO BE TAKEN AT 4.53%, AS THE TPO HIMSELF HAS, PURSUANT TO THE DIRECTIONS OF THE DRP TO ADOPT ALP AT LIBOR+4%, TAKEN THE ALP AT 8.53%. THE ORDE R DATED 19TH MARCH 2013, A COPY OF WHICH WAS PLACED BEFORE US AT PAGES 426 AND 427 OF THE PAPER - BOOK, CLEARLY EVIDENCES THIS FACTUAL POSITION. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE HAS ADVANCED THE LOAN TO THE SUBSIDIARY AT 7% PER ANNUM. CLEARLY, THER EFORE, AS LONG AS THE COMPARABLE UNCONTROLLED PRICE OF THE US $ DENOMINATED LENDING IS LESS THAN 247 POINTS (I.E.700 - 453) ABOVE THE LIBOR RATE, THE TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS SUBSIDIARY CANNOT BE SAID TO BE AT LESS THAN ARMS LENGTH P RICE. THE TRANSFER PRICING STUDY FILED BY THE ASSESSEE, HOWEVER, DOES NOT THROW MUCH LIGHT ON THIS ASPECT OF THE MATTER BEYOND STATING, IN RATHER VAGUE TERMS, THAT A STUDY REVEALED THAT AROUND 100 BASIS POINTS INCREASE IN THE LIBOR RATE IS CONSIDERED APPR OPRIATE FOR LENDING TO CORPORATES , AND THAT THEREFORE, THE ADJUSTED INTEREST PERCENTAGE IS TO BE TAKEN THE ARM S LENGTH INTEREST RATE I.E. 5.53% . SUCH SWEEPING GENERALIZATIONS AND VAGUE JUSTIFICATIONS AS INHERENT IN THE ABOVE COMMENT IN THE TP STUDY, IN SUPPORT OF LIBOR+100 BASIS POINTS AS ALP, CANNOT MEET ANY JUDICIAL APPROVAL. 6. WHAT IS IMPORTANT, HOWEVER, IS THAT EVEN AFTER THIS STATED ALP OF LIBOR + 100 BASIS POINTS, THERE IS STILL A CUSHION OF FURTHER 147 BASIS POINTS BEFORE THE INTEREST CHARGED C AN BE SAID TO MORE THAN THE ARM S LENGTH PRICE, AND IT IS AN OLD MATTER. IT IS, THEREFORE, WORTH EXPLORING WHETHER, EVEN WITHIN THE LIMITATIONS OF SOMEWHAT SKETCHY INFORMATION AVAILABLE ON THE FACTS OF THIS CASE, THE MATTER CAN BE DECIDED ONE WAY OR THE OT HER RATHER THAN SENDING IT BACK TO THE TPO FOR FRESH ADJUDICATION. 7. WHILE EXPLORING SUCH POSSIBILITIES, IT WILL BE USEFUL TO TAKE NOTE OF THE FACT THAT IN THE CASE OF BHARTI AIRTEL LIMITED VS ACIT [(2014) 161 TTJ 283], AND A COORDINATE BENCH HAD DELETED A SIMILAR ALP ADJUSTMENT ON ACCOUNT OF INTEREST AMOUNTING TO RS 10,11,786 WHEREIN THE SAME APPROACH OF ADOPTING 400 BASIS POINTS ABOVE THE LIBOR AS ALP WAS ADOPTED. WHILE DELETING THIS ALP ADJUSTMENT, SPEAKING THROUGH ONE OF US, THE TRIBUNAL HAD, INTE R ALI A, OBSERVED AS FOLLOWS: 62. AS FAR AS THE FIRST ADJUSTMENT IS CONCERNED, WHILE THE TPO HAS ADOPTED THE RATE AS 4% OVER LIBOR RATE, HE HAS NOT SET OUT THE SPECIFIC BASIS OF THIS RATE. HE HAS MENTIONED ABOUT SOME INFORMATION GATHERED FROM WEBSITES OF FINANCI AL INSTITUTIONS WHICH, ACCORDING TO HIM, STATES THAT, 'FOR THE FOREIGN CURRENCY DENOMINATED TERM LOANS, THE MAXIMUM RATE OF INTEREST IS 4% OVER 6 MONTHS LIBOR', AND THEN PROCEEDED TO ADOPT THIS MAXIMUM INTEREST RATE AS A FAIR BASIS FOR HIS COMPUTING THE AR M'S LENGTH PRICE. ON THE OTHER HAND, THE ASSESSEE HAS ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 6 OF 11 TAKEN TWO SPECIFIC COMPARABLES OF USD BORROWINGS, I.E. L&T AND SERI INFRASTRUCTURE, ON THE INTEREST RATE OF LIBOR + 150 BPS AND 1.4% TO 1.7% BAND OVER LIBOR RESPECTIVELY. THERE IS NO MATERIAL WHATSOEVER , SAVE AND EXCEPT FOR VAGUE OBSERVATIONS ABOUT WEAK FINANCIALS OF THE SUBSIDIARIES - WHICH ARE NOT SUPPORTED BY ANY SPECIFIC FACTS AND PROCEED ON SWEEPING GENERALIZATIONS AND ASSUMPTIONS, TO REJECT THE COMPARABLES TAKEN BY THE ASSESSEE. WHEN A TRANSFER PRI CING OFFICER REJECTS COMPARABLES TAKEN BY THE ASSESSEE, HE HAS TO SET OUT SPECIFIC, COGENT AND LEGALLY SUSTAINABLE REASONS FOR DOING SO. ON THIS POINT, THEREFORE, THE STAND OF THE ASSES SING OFFICER CANNOT BE ACCEPTED . 65. THAT LEAVES US WITH THIR D POINT OF DIFFERENCE BETWEEN THE ASSESSEE AND THE TPO AND THAT IS WITH REGARD TO ADJUSTMENT OF 177.60 POINTS, AS BALANCING FIGURE, TOWARDS LACK OF SECURITY AND LENDER NOT BEING IN THE BUSINESS OF BORROWING AND LENDING MONEY. THIS ADJUSTMENT IS JUSTIFIED B Y T HE TPO ON THE FOLLOWING GROUND: 7.10 ADJUSTMENT BETWEEN A BANKER AND NON - BANKER AS THE TAXPAYER IS NOT IN THE BUSINESS OF LENDING AND BORROWING MONEY, HIS RISK IS HIGHER IN ADVANCING LOAN TO A SINGLE CUSTOMER THAN A BANK, WHICH SPREADS ITS RISK AMONG IT S VARIOUS CUSTOMERS. THUS, THE DIFFERENCE BETWEEN BANKER AND NON - BANKER IS TO BE KEPT IN MIND WHILE ARRIVING AT THE ARM'S LENGTH CUP RATE BASED ON BANK RATES. 7.11 ADJUSTMENT FOR SECURITY USUALLY, BANKERS EXTENDING LOANS IN FOREIGN CURRENCY ALSO INSIST ON SUFFICIENT SECURITY. IN THIS CASE, NO SECURITY IS OFFERED BY THE AE. KEEPING IN VIEW THE FINANCIAL HEALTH OF THE SUBSIDIARY, IT MAY NOT BE IN A POSITION TO OFFER SECURITY. THUS AN ADJUSTMENT IS REQUIRED TO BE MADE FOR NOT OFFERING A SECURITY. THIS MAY BE C OMPUTED AS THE DIFFERENCE BETWEEN THE INTEREST RATES PREVAILING FOR THE BONDS OF EQUIVALENT CREDIT RATING OF THE AE AND SOVEREIGN GOVERNMENT BONDS IN THE COUNTRY IN WHICH THE AE IS LOCATED. THIS CAN ALSO BE CONSIDERED AS THE GUARANTEE COST PAYABLE TO THE T AXPAYER FOR GIVING GUARANTEE FOR EQUIVALENT AMOUNT OF LOAN GIVEN TO THE AE I.E. THE RATE DIFFERENTIAL FOR THE DIFFERENCE IN INTEREST SPREAD BETWEEN THE CREDIT RATING OF THE TAXPAYER AND THE AE. THUS AFTER THE ABOVE ANALYSIS, THE EQUIVALENT INTEREST RATE IS THE INTEREST RATE INCLUDING THE TRANSACTION COST FOR A FOREIGN CURRENCY LOAN, IF GIVEN TO THE AE FO R ITS CREDIT STANDING / RATING. 66. WE SEE NO SUBSTANCE IN THIS ADJUSTMENT EITHER. THE TPO HAS TAKEN THE LENDER AS THE TESTED PARTY, AND YET MADE ADJUSTMENT S FOR HIGHER RISKS ON ACCOUNT OF ASSUMED LACK OF SECURITY AND INCREASED RISK OF SINGLE PARTY DEALING. THIS APPROACH OVERLOOKS THE FACT THAT THE ASSESSEE HAS ADVANCED MONIES TO ITS SUBSIDIARIES WHICH ARE UNDER ITS MANAGEMENT AND CONTROL - A FACTOR WHICH SUBS TANTIALLY REDUCES THE RISK RATHER THAN INCREASING IT. ON THESE FACTS, IT IS DIFFICULT TO UNDERSTAND, MUCH LESS APPROVE, ANY RATIONALE FOR ADJUSTMENT ON ACCOUNT OF HIGHER RISKS. ON THIS POINT ALSO, WE SEE NO MERITS IN THE STAND OF THE T PO. (EMPHASIS, BY UND ERLINING, SUPPLIED BY US NOW) 8. WHEN THE MATTER WAS CARRIED IN FURTHER APPEAL, THIS TIME BY THE COMMISSIONER, BEFORE HON BLE DELHI HIGH COURT, THEIR LORDSHIPS WERE, VIDE JUDGMENT DATED 25TH FEBRUARY ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 7 OF 11 2015 - A COPY OF WHICH WAS PLACED BEFORE US BY THE LEARNE D COUNSEL, PLEASED TO APPROVE THE REASONING ADOPTED BY THE TRIBUNAL. IN DOING SO, THEI R LORDSHIP OBSERVED AS FOLLOWS: 8. THE ITAT HAS ALSO TAKEN NOTE OF THE FACT THAT TWO SPECIFIC COMPARABLES OF USD BORROWINGS I.E. L&T AND SERI INFRASTRUCTURE, ON THE INTER EST RATE OF LIBOR HAD BEEN TAKEN INTO CONSIDERATION. THERE IS NO MATERIAL WHATSOEVER, SAVE AND EXCEPT FOR VAGUE OBSERVATIONS ABOUT WEAK FINANCIALS OF THE SUBSIDIARIES - WHICH ARE NOT SUPPORTED BY ANY SPECIFIC FACTS AND PROCEED ON SWEEPING GENERALIZATIONS A ND ASSUMPTIONS, TO REJECT THE COMPARABLES TAKEN BY THE ASSESSEE. WHEN A TRANSFER PRICING OFFICER REJECTS COMPARABLES TAKEN BY THE ASSESSEE, HE HAS TO SET OUT SPECIFIC, COGENT AND LEGALLY SUSTAINABLE REASONS FOR DOING SO. ON THIS POINT, THEREFORE, THE STAND OF THE ASSESSING OFFICER CANNOT BE ACCEPTED. 9.................. 10. THE TRIBUNAL FURTHER NOTICED THAT THE ASSESSEE ADVANCED MONIES TO THE SUBSIDIARIES WHICH WERE UNDER ITS MANAGEMENT AND CONTROL, WHICH IN FACT SUBSTANTIALLY REDUCED THE RISK AND IN THESE CIRCUMSTANCES THERE WAS NO RATIONALE OF ADJUSTING ANY AMOUNT OF HIGHER BASIS. 11. THIS COURT IS OF THE OPINION THAT THE REASONING OF THE IT AT ON EACH OF THE HEADS WHICH WENT INTO THE ADJUSTMENT OF ?10,11786/ - IS REASONABLE AND JUSTIFIED AND DOES NOT CALL FOR ANY INTERFERENCE. (EMPHASIS, BY UNDERLINING, SUPPLIED BY US) 9. THAT WAS ALSO A CASE IN WHICH THE LENDER PARENT COMPANY WAS TAKEN AS THE TESTED PARTY, THE LOAN WAS ADVANCED TO A SUBSIDIARY COMPANY WITHOUT MUCH TO THE CREDIT OF ITS FINANCIAL CREDENTIALS AND THE LOAN WAS TREATED AS A HIGH RISK LOAN RESULTING IN ADOPTING THE MAXIMUM LIBOR RATE ON WHICH DOLLAR LOANS WERE ADVANCED. YET, HONBLE HIGH COURT SPECIFICALLY APPROVED THE TRIBUNALS REASONING THAT THE ASSESSEE ADVANCED MONIES TO THE SUBSIDIARIES WHIC H WERE UNDER ITS MANAGEMENT AND CONTROL, WHICH IN FACT SUBSTANTIALLY REDUCED THE RISK AND IN THESE CIRCUMSTANCES THERE WAS NO RATIONALE OF ADJUSTING ANY AMOUNT OF HIGHER BASIS . WHEN SUCH ARE THE VIEWS OF THEIR LORDSHIPS, IT IS FUTILE TO SUGGEST THAT THE L OANS ADVANCED BY THE PARENTS TO SUBSIDIARY CAN INDEED BE TAKEN AS BB TO D GRADE INVESTMENTS WHICH REFERS TO, AS NOTED BY THE TPO HIMSELF AT PAGE 28 OF THE ORDER, INVESTMENTS WITH SERIOUS RISKS OF INADEQUATE SAFETY, INVESTMENTS OF HIGH RISK, INVESTMENTS OF SUBSTANTIAL RISK AND INVESTMENTS OF DEFAULT. THE APPROACH ADOPTED BY THE DRP CANNOT, THEREFORE, MEET OUR APPROVAL. 8. IN THIS VIEW OF THE MATTER, NOT ONLY THE FICTION OF ASSUMING A CORPORATE GUARANTEE AND THEN PROCEEDING TO BENCHMARK THE SAME, IS UNSUSTAIN ABLE IN LAW, EVEN OTHERWISE AN ADJUSTMENT DUE TO ASSUMPTION ABOUT LOWER CREDIT RATING OF THE SUBSIDIARY IS NOT WARRANTED. PERHAPS THE SITUATION COULD HAVE BEEN MATERIALLY DIFFERENT IF THE CREDIT RATING OF THE SUBSIDIARY WAS DEMONSTRATED TO BE LOWER BUT THA T IS NOT THE CASE BEFORE US. IN ANY CASE, IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, THE TPO HIMSELF HAS ADOPTED LIBOR PLUS 2% AS AN ARM S LENGTH INTEREST AND THERE IS NO MATERIAL CHANGE IN THE FACTS AND CIRCUMSTANCES O F THE CASE IN THIS YEAR. IN VIEW O F THESE DISCUSSIONS, AND BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE TO THE LIMITED EXTENT THAT THE ALP ADJUSTMENT IS REQUIRED TO BE MADE ON THE BASIS OF LIBOR PLUS 2% . GROUND NO. 3, THEREFORE, IS TO BE ALLOWED. 9 . GROUND NOS. 1 AND 2 ARE THUS DISMISSED AND GROUND NO. 3 IS ALLOWED. ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 8 OF 11 10 . IN GROUND NO. 4 AND 7, WHICH WE WILL TAKE UP TOGETHER , THE GRIEVANCE S RAISED BY THE ASSESSEE IS AS FOLLOWS: THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS.1 5,02,592/ - MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF 1/5 TH OF GDR ISSUE EXPENSES CLAIMED BY THE COMPANY AS ALLOWABLE DEDUCTION U/S.35D OF THE ACT ON THE GROUND T HAT THE EXPENSES INCURRED FOR ISSUE OF SHARE CAPITAL IS CAPITAL LOSS TO THE COMPANY. IN VIE W OF FACTS AND SUBMISSIONS FILED AS WELL AS LEGAL POSITION, THE IMPUGNED ADDITION OF RS.15,02 , 592/ - REQUIRES TO BE DELETED. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN HOLDING THAT THE LOSS DUE TO F OREIGN EXCHANGE FLUCTUATION AMOUNTING TO RS.5,46,50,757/ - BEING RELATABLE TO GD ISSUE IS A PERMANENT CAPITAL LOSS OF THE COMPANY AND HENCE BENEFIT OF CAPITALIZATION OF THE SAID LOSS IN FUTURE WILL NOT BE AVAILABLE TO THE COMPANY. IN VIEW OF FACTS AND SUBM ISSIONS FILED AS WELL AS LEGAL POSITION, THE OBSERVATION AND FINDINGS OF THE AO THOUGH NOT HAVING ANY REVENUE EFFECT DURING THE YEAR UNDER CONSIDERATION REQUIRES TO BE QUASHED/VACATED AND THE SAID LOSS OF RS.5,46,50,757/ - BEING ON REVENUE ACCOUNT REQUIRES TO BE ALLOWED AS A DEDUCTION AND THE TOTAL INCOME BE REVISED ACCORDINGLY. 11. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS ALSO COVERED, AGAINST THE ASSESSEE, BY A DECISION OF THE COORDINATE BENCH IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2007 - 08 (SUPRA), WHEREIN THE COORDINATE BENCH HAS INTER ALIA OBSERVED AS FOLLOWS: 15. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CONCERNED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER N OTED THAT THE ASSESSEE HAS INCURRED EXPENSES OF RS 75,12,960 ON GDR ISSUE AND THE TREATED THE SAME AS PRELIMINARY EXPENSES ELIGIBLE FOR AMORTIZATION UNDER SECTION 35D OF THE ACT. HOWEVER, THE ASSESSING OFFICER DECLINED THE DEDUCTION OF RS 15,02,592, CLAIME D BY THE ASSESSEE UNDER SECTION 35D, BY OBSERVING THAT IT IS SETTLED LAW THAT WHATEVER EXPENSE IS INCURRED FOR ISSUE OF SHARE CAPITAL IS CAPITAL LOSS TO THE COMPANY AND IS NEITHER REVENUE EXPENDITURE NOR A CAPITAL EXPENDITURE FOR THE PURPOSES OF BUSINESS . AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BE FORE THE CIT(A) BUT WITHOUT ANY SUCCESS. WHILE REJECTING THE CONTENTION OF THE ASSESSEE, LEARNED CIT(A) OBSERVED THAT, THE FACTS OF THE CASE ARE ALSO SQUARELY COVERED BY THE SUPREME COURT DECISION IN T HE CASE OF BROOKE BOND INDIA LTD VS CIT (225 ITR 798) , THAT THESE EXPENSES ARE NOT IN NATURE OF PRELIMINARY EXPENSES AND ARE, THEREFORE, NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 35D , AND THAT THE APPELLANT HAS GIVEN A LOAN OUT OF THIS AMOUNT TO I TS SUBSIDIARY IN UAE AND, THEREFORE, IT HAS NOT BEEN USED FOR ANY OF THE PURPOSES UNDER SECTION 35D OF THE ACT . THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPEAL BEFORE US. 16. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 17. WE FIND THAT, AS HELD BY HON BLE SUPREME COURT IN THE CASE OF BROOKE BOND LIMITED (SUPRA), THE EXPENSES ON ISSUANCE OF SHARE CAPITAL ARE CAPITAL EXPENSES IN NATURE AND THAT THE SE EXPENSES CANNOT BE ALLOWED AS A DEDUCTION AS REVENUE EXPENSES. HOWEVER, AS LONG AS THESE EXPENSES, EVEN IF CAPITAL IN NATURE, SATISFY THE CONDITIONS SET OUT IN SECTION 35D, THESE EXPENSES ARE ELIGIBLE FOR AMORTIZATION UNDER SECTION 35D. ONE OF THE CONDI TIONS IN SECTION 35D(1), AS IT STOOD AT THE MATERIAL POINT OF TIME, IS THAT EITHER THE ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 9 OF 11 ELIGIBLE EXPENSES SHOULD BE INCURRED BEFORE THE COMMENCEMENT OF THE BUSINESS, AND, IN A SITUATION IN WHICH THE EXPENSES ARE INCURRED AFTER THE COMMENCEMENT OF BUSINESS, THE EXPENSES SHOULD BE INCURRED FOR EXTENSION OF HIS UNDERTAKING OR SETTING UP OF A NEW INDUSTRIAL UNDERTAKING. THIS CONDITION IS CLEARLY NOT SATISFIED ON THE FACTS OF THE PRESENT CASE AS THE EXPENSES ARE INCURRED AFTER THE COMMENCEMENT OF THE BUSINESS AND IT IS NOT EVEN ASSESSEE S CASE THAT THE EXPENSES ARE INCURRED FOR EXTENSION OF HIS UNDERTAKING OR FOR SETTING UP OF NEW INDUSTRIAL UNDERTAKING. AS FOR THE DECISION OF A COORDINATE BENCH, IN THE CASE OF MAHINDRA & MAHINDRA LTD VS JVIT [(2010) 36 SOT 348 (B OM)], THIS DECISION WAS IN THE CONTEXT OF FOREIGN CURRENCY CONVERTIBLE BONDS WHICH WERE DEBT INSTRUMENTS, THOUGH CONVERTIBLE INTO EQUITY AT A LATER STAGE. THAT DECISION HAS NO BEARING ON THE FACTS OF THIS CASE. IN VIEW OF THESE DISCUSSIONS, WE SEE NO MERIT S IN THIS GRIEVANCE OF THE ASSESSEE EITHER. THE STAND OF THE AUTHORITIES BELOW DOES NOT CALL FOR ANY INTERFERENCE. 12. AS LEARNED COUNSEL FOR THE ASSESSEE HAS FAIRLY CONCEDED THAT THESE ISSUES MUST BE DECIDED AGAINST THE ASSESSEE AT THIS FORUM, AND THAT HE WILL CARRY THE MATTER, IF SO ADVISED, IN FURTHER APPEAL BEFORE HON BLE COURTS ABOVE , AND RESPECTFULLY FOLLOWING THE VIEWS OF THE COORDINATE BENCH IN ASSESSEE S OWN CASE, WE CONFIRM THE STAND OF THE AUTHORITIES BELOW ON THIS POINT AND DECLINE TO INTERFERE IN THE MATTER. 13. GROUND NO. 4 AND 7 ARE THUS DISMISSED. 14. IN GROUND NO. 5, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: THE LEARNED C IT (A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS.57,76,604/ - MADE BY THE ASSESSING OFFICER BEIN G FOREX DERIVATIVE LOSS OUT OF TOTAL ADDITION OF RS.1,26,73,306/ - WHILE TREATING IT AS SPECULATIVE AND NOTIONAL LOSS NOT ALLOWABLE FOR SET - OFF AGAINST TA XA BLE INCOME WITHOUT PROPER CONSIDERATION AND APPRECIATION OF THE FACTS OF THE CASE. IN VIEW OF FACTS AND SUBMISSIONS FILED AS WELL A S LEGAL POSITION, THE IMPUGNED LOSS OF RS.57,76,604/ - REQUIRES TO BE ALLO WED AS CLAIMED BY THE APPELLANT. 15 . DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE HAD CLAIMED LOSS ON DERIVATI VE TRANSACTIONS DURING THE YEAR AMOUNTING TO RS 57,76,604. WHEN THE ASSESSING OFFICER PROBED THE MATTER FURTHER, IT WAS FOUND THAT THESE TRANSACTIONS WERE STATED TO BE HEDGE THE FOREIGN EXCHANGE OBLIGATIONS OF THE ASSESSEE IN RESPECT OF EXPORT REALIZATIONS . . AS THIS FORWARD CONTRACT WAS SAID TO BE IN THE COURSE OF ASSESSEE S BUSINESS, AND IN RESPECT OF HIS FOREIGN EXCHANGE DEALINGS, THE LOSS WAS CLAIMED AS A BUSINESS LOSS. THE ASSESSING OFFICER, HOWEVER, DID NOT AGREE. HE WAS OF THE CONSIDERED VIEW THAT SIN CE THE CONTRACT WAS SETTLED, OTHERWISE THAN THROUGH DELIVERY, SECTION 43(5) WAS ATTRACTED, AND, ACCORDINGLY, LOSS WAS REQUIRED TO BE TREATED AS SPECULATIVE LOSS. THE ASSESSING OFFICER WAS ALSO OF THE VIEW THAT, IN THE LIGHT OF CBDT INSTRUCTION NO. 3 OF 20 10 DATED 23 RD MARCH 2010, SUCH A LOSS IN FOREIGN EXCHANGE DERIVATES CANNOT BE ALLOWED AS DEDUCTION. IT WAS IN THIS BACKGROUND THAT THE ASSESSING OFFICER DISALLOWED DEDUCTION OF RS 57,76,604. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (A ) BUT WITHOUT ANY SUCCESS. THE CIT(A) WAS OF THE VIEW THAT ASSESSEE HAS NOT BEEN ABLE TO LINK HE TRANSACTIONS IN FOREIGN EXCHANGE DERIVATIVES WITH THE FOREIGN EXCHANGE REALIZATIONS, AND AS THE TRANSACTIONS HAVE BEEN SETTLED WITHOUT DELIVERY AND ARE, AS S UCH, SPECULATIVE TRANSACTIONS IN NATURE. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPEAL BEFORE US. ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 10 OF 11 16 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POS ITION. 17 . WE HAVE NOTICED THAT, AS EVIDENT FROM A PLAIN READING OF THE ASSESSMENT ORDER, THE SHORT CASE OF THE ASSESSING OFFICER IS THAT SINCE THE TRANSACTION LEADING TO THE IMPUGNED LOSS IS A SPECULATIVE TRANSACTION, UNDER SECTION 43(5) OF THE ACT, THE LOSS INCURRED ON THE TRANSACTION IS REQUIRED TO BE TREATED AS LOSS FROM SPECULATIVE BUSINESS WHICH CANNOT BE SET OFF AGAINST INCOME OF THE ASSESSE UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND PROFESSION . HOWEVER, IN OUR CONSIDERED VIEW, THIS APPROA CH ITSELF PROCEEDS ON THE FALLACY THAT EVERY LOSS, IN THE COURSE OF OR DUE TO A SPECULATIVE TRANSACTION, IS TO BE TREATED AS LOSS OF THE SPECULATIVE BUSINESS. EXPLANATION 2 TO SECTION 28 STATES, WHERE SPECULATIVE TRANSACTIONS CARRIED ON BY AN ASSESSEE ARE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS, THE BUSINESS (HEREINAFTER REFERRED TO AS 'SPECULATION BUSINESS' SHALL BE DEEMED TO BE DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS , WHICH IMPLIES IT IS ONLY WHEN SPECULATIVE TRANSACTIONS ARE OF SUCH A NATURE AS TO CONSTITUTE BUSINESS ON STANDALONE BASIS, THE INCOME AND LOSSES FROM SUCH TRANSACTIONS IS REQUIRED TO BE TREATED AS DISTINCT AND SEPARATE FROM ANY OTHER NORMAL BUSINESS. IN OTHER WORDS, EVEN SPECULATIVE TRANSACTIONS, AS LONG AS SUCH TRANSACTIONS ARE INCIDENTAL TO THE MAIN BUSINESS OF THE ASSESSEE, CANNOT RESULT IN THE PROFITS OR LOSSES FROM SUCH TRANSACTIONS BEING TREATED SEPARATELY AS THAT OF A SPECULATION BUSINESS AND THUS MAKING THEM INELIGIBLE FOR BEING SET OFF AGAINST NORMAL BUSINESS PROFITS AND LOSSES. NOTHING REALLY, THEREFORE, TURNS ON A TRANSACTION BEING SETTLED, OTHERWISE THAN THROUGH DELIVERY, AS LONG AS SUCH A TRANSACTION HAS STANDALONE CHARACTER ISOLATED FROM THE MAIN ACTIVITIES OF BUSINESS. FOR THIS SHORT REASON ALONE, THE ACTION OF THE ASSESSING OFFICER MUST BE HELD TO BE UNSUSTAINABLE IN LAW. IN ANY EVENT, THE ASSESSEE HAS FILED DETAILED CONTRACTS NOTES BEFORE US WHICH LINK THE TRANSACTIONS TO FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE . AS A MATTER OF FACT, EACH OF THE CONFIRMATIO N SO FILED FROM THE ICICI BANK CATEGORICALLY STATES THAT THE NOTIONAL PRINCIPAL AMOUNT OF THE TRANSACTION DOES NOT EXCEED THE OUTSTANDING AMOUNT OF UNDERLYING TRANSACTIONS WHICH THE COUNTERPARTY ( I.E. THE ASSESSEE ) , SEEKS TO HEDGE AGAINST . IN THIS VIEW OF THE MATTER, ALL THE DERIVATE TRANSACTIONS ARE SPECIFIC HEDGING TRANSACTIONS AGAINST FOREIGN EXCHANGE TRANSACTIONS OF THE ASSESSEE AND ARE TO BE TREATED AS INTEGRAL PART OF THE BUSINESS TRANSACTIONS OF THE ASSESSEE. THESE TRANSACTIONS, BY NO STRETCH OF L OGIC, CANNOT BE TREATED AS STANDALONE TRANSACTIONS, AND AS SUCH LOSS ON THESE TRANSACTIONS CANNOT BE TREATED AS LOSS FROM SPECULATION BUSINESS INELIGIBLE FOR SET OFF AGAINST NORMAL BUSINESS PROFITS. AS FOR THE CBDT INSTRUCTION RELIED UPON BY THE ASSESSIN G OFFICER, SUCH INSTRUCTIONS DO NOT BIND THE APPELLATE AUTHORITIES, AND NOTHING, THEREFORE, TURNS ON THE SAME - SO FAR AS OUR ADJUDICATION IS CONCERNED. THE LOSSES ON ACCOUNT OF FOREIGN EXCHANGE CONTRACTS ARE BONAFIDE EXPENSES INCURRED IN FURTHERANCE OF LEG ITIMATE BUSINESS INTERESTS OF THE ASSESSEE AND ARE TO BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) AS SUCH. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE PLEA OF THE ASSESSEE. THE ASSESSING OFFICER IS, THEREFORE, DIRECTED TO DELETE THE IMPUGNED DISALLOWANCE OF RS 57,76,604. ITA NO. 472 / AHD/201 4 ASSESSMENT Y EAR: 20 0 8 - 09 PAGE 11 OF 11 17. GROUND NO. 5 IS THUS ALLOWED. 18. IN GROUND NO. 6, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS.68, 96,702/ - BEING LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATION OUT OF TOTAL ADDITION OF RS.1,26,73,306/ - WHILE TREATING IT AS NOTIONAL LOSS NOT ALLOWABLE U/S.37(1) OF THE ACT WITHOUT PROPER CONSIDERATION AND APPRECIATION OF THE FACTS OF THE CASE. IN VIEW OF FACTS AND SUBMISSIONS FILED AS WELL AS LEGAL POSITION AND MORE PARTICULARLY KEEPING IN VIEW THE CONTRADICTORY STAND OF THE ASSESSING OFFICER IN ACCEPTING THE GAIN ARISING ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AND REJECTING THE LOSS ON IDENTICAL TRANSACTI ONS, THE IMPUGNED LOSS OF RS.68,96,702/ - REQUIRES TO BE ALLOWED AS CLAIMED BY THE APPELLANT. 19. LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THE ABOVE GRIEVANCE, AND, IT IS, AS SUCH, DISMISSED AS NOT PRESSED. 20. GROUND NO. 6 IS THUS DISMISSED. 21 . I N THE RESULT, THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 11 TH DAY OF APRIL , 2017 . SD/ - SD/ - RAJPAL YADAV PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: 11 TH DAY OF APRIL , 201 7 . PBN/* COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD