ADITYA BIRLA MINACS WORLDWIDE LTD SUCCESSORS TO ADITYA BILA MINACS TECHNOLOGIES LTD (SINCE AMALGAMATED), BANGALORE V. JT CIT OSD 8(1), MUMBAI

ITA 484/MUM/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70713 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2009-2010
• Appeal Filed On: 16-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RONAK G DOSHI
• Keywords: Services rendered outside India; Speculation loss
• Section: 115JB; 37

Judgement Text

. , IN THE INCOME TAX APPELLATE TRIBUNAL SMC , BENCH MUMBAI , BEFORE SHRI R. K. GUPTA , JM ITA NO. 484 / MUM/ 20 1 3 ( ASSESSMENT YEAR : 200 9 - 10 ) ADITYA BIRLA MINACS WORLDWIDE LIMITED, SUCCESSORS TO ADITYA BIRLA MINACS TECHNOLOGIES LIMITED (SINCE AMALGAMATED), 3 RD FLOOR, MILLENNIUM TOWER, ITPL ROAD, BROOKFILEDS, BANGALAORE - 560 037 VS. JCIT - 8(1), MUMBAI - 20 . PAN/GIR NO. : AAACT 1567 A ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI RONAK G. DOSHI /REVENUE BY : SMT. JOTHILAKSHMI NAYAK DATE OF HEARING : 1 ST JULY , 201 3 DATE OF PRONOUNCEMENT : 21 ST AUGUST 2013 O R D E R TH E ASSESSEE HAS PREFERRED THIS APPEAL AGAINST THE ORDER OF LEANED CIT(A) - 16 , MUMBAI RELA TING TO THE ASSESSMENT YEAR S 200 9 - 10 . 2 . THE ASSESSEE IN ITS APPEAL HAS OBJECTED IN CONFIRMING THE ADDITION OF RS.1,04,42,248/ - BEING THE PROVISION FOR FOREIGN EXCHANGE LOSS. THE ASSESSEE HAS ALSO OBJECTED IN CONFIRMING THE ADDITION OF RS. 1,04,42,248/ - BEING THE PROVISION FOR LOSS ON FORWARD CONTRACTS TO THE AMOUNT OF NET ITA NO. 484 /20 1 3 2 PRO FIT AS PER PROFIT AND LOSS ACCOUNT WHILE DETERMINING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. 3 . BRIEF FACTS OF THE CASE ARE THAT D URING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD CLAIMED A SUM OF RS. 2,2 8,34,362/ - ON ACCOUNT OF FOREIGN EXCHANGE LOSS, WHICH IS INCLUSIVE OF PROVISION TOWARDS FOREIGN EXCHANGE LOSS ON DERIVATIVES AMOUNTING TO RS. 1,04,42,248/ - . THE ASSESSING OFFICER ASKED THE AS S ESSEE TO SHOW CAUSE AS TO WHY THE FOREIGN EXCHANGE LOSS OF RS .1,04,42,248/ - PURPORTED TO HAVE BEEN SUFFERED ON ACCOUNT OF PROVISION TOWARDS FORWARD CONTRACT REINSTATEMENT, SHOULD NOT BE TREATED AS 'SPECULATIVE LOSS'. FURTHER, SUCH LOSS ALSO BEING IN THE NATURE OF MERE 'PROVISIONS' IS, THEREFORE, NOTHING BUT CONTI NGENT IN NATURE, HENCE TO WHY THE SAME SHOULD NOT BE DISALLOWED AS A PART OF BUSINESS LOSS AS HAS BEEN CLAIMED BY THE ASSESSEE COMPANY. IN REPLY, THE ASSESSEE SUBMITTED THAT IT HAD TAKEN THE FORWARD COVER EXACTLY WHICH WAS REQUIRED TO COVER THE TRANSACTION S WITH BANK AS THE SAME WAS NECESSARILY REQUIRED FOR DOING TRANSACTION IN FOREX. THAT IS NOTHING BUT THE LOSS ON FORWARD CONTRACTS AND THE SAME IS ALLOWABLE UNDER THE PROVISIONS OF LAW AS PART OF BUSINESS LOSS. THE AO DID NOT FIND THE CONTENTION ACCEPTABLE AND HELD THAT IT IS INTRINSICALLY A PROVISION MADE BY THE ASSESSEE FOR FOREIGN EXCHANGE LOSS ON DERIVATIVES AND ACCORDINGLY THE LOSS OF RS. 1,04,42,248/ - PURPORTED TO HAVE BEEN SUFFERED ON HEDGING WAS TREATED AS PROVISIONAL IN NATURE AND ITA NO. 484 /20 1 3 3 DISALLOWED AS A PART OF BUSINESS LOSS AS HAS BEEN CLAIMED BY THE ASSESSEE COMPANY. 4. IN APPEAL BEFORE THE LEARNED CIT(A) , THE ASSESSEE SUBMITTED THAT THAT IT IS ENGAGED, INTER - ALIA, IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND IMPLEMENTATION, PROVIDES SERVICES TO ITS CUS TOMERS WHO ARE ALL IOCATED OUTSIDE INDIA AND , HENCE , THE INVOICES ARE RAISED IN FOREIGN CURRENCY. IN ORDER TO OFFSET THE RISKS THAT ARISE FROM EXPOSURE TO FOREIGN CURRENCY FLUCTUATION, THE ASSESSEE ENTERS INTO FORWARD CONTRACTS TO RESTRICT ITS EXPOSURE AND TAKES COVER ON ALL ITS RECEIVABLES FROM SUCH OVERSEAS CLIENTS. THE ASSESSEE IS REQUIRED T O SATISFACTORILY COMPLY WITH AS 11. CASH RECEIVABLES ARE MONETARY ITEMS, AT THE YEAR END, BY USING THE CLOSING RATE. ACCORDINGLY, AT THE YEAREND (I.E. THE END OF THE F INANCIAL YEAR), THE ASSESSEE VALUES THE OPEN FORWARD CONTRACTS AT THE CLOSING RATE OF FOREIGN EXCHANGE WHICH GIVES RISE TO THE LOSS OR GAIN IN REINSTATEMENT. IN ORDER TO COMPLY WITH THE AS, THE ASSESSEE PASSES APPROPRIATE ENTRIES IN ITS BOOKS AT THE YEAR E ND. FOR THE YEAR UNDER CONSIDERATION, THE APPELLANT DEBITED A FOREIGN EXCHANGE LOSS OF RS.1,04,42,248/ - IN THE PROFIT & LOSS ACCOUNT. PARA 36 OF AS 11 DEALS WITH FORWARD EXCHANGE CONTRACTS AND THE GAINS LOSS ARISING THEREON AND ITS TREATMENT IN THE P&L AC COUNT AND STATES THAT EXCHANGE DIFFERENCE ON FORWARD EXCHANGE CONTRACT SHOULD BE RECOGNISED IN THE P&L ACCOUNT IN THE PERIOD IN WHICH THE EXCHANGE RATES CHANGE. THAT THE FORWARD CONTRACTS ARE TAKEN WITH A VIEW TO MITIGATE THE FOREIGN CURRENCY EXPOSURE, THE SAME CANNOT BE TREATED AS A SPECULATIVE TRANSACTION. ITA NO. 484 /20 1 3 4 THE SIGNIFICANT ACCOUNTING POLICIES (NOTE 1(F) AND THE NOTE 13 TO THE AUDITED ANNUAL ACCOUNTS CORROBORATES THE ASSESSEES CLAIM. THE ASSESSE E PLACED RELIANCE UPON THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (312 ITR 254) (SC) AND DECISION OF THE SPECIAL BENCH OF THE MUMBAI TRIBUNAL IN DCIT VS. BANK OF BAHRAIN & KUWAIT (41 SOT 290) (MUM) (SB) , WHICH HAS APPLIED THE RATIO OF THE WOODWARD GOVERNOR CASE. T HUS IT WAS SUBMITTED FOR THE ASSESSEE THAT THE PROVISIONS MADE ON ACCOUNT OF LOSS OF FOREIGN EXCHANGE BE ALLOWED AS DEDUCTION U/S. 37 (L)OF THE ACT. AFTER CONSIDERING THE SUBMISSION AND THE ORDER OF THE AO, LEARNED CIT(A) FOUND THAT THE AO WAS CORRECT IN M AKING THE DISALLOWANCE ON ACCOUNT OF LOSS ON FOREIGN EXCHANGE LOSS. LEARNED CIT(A) NOTED THAT THE ASSESSEE HAS CLAIMED DEDUCTION FOR LOSS ON ACCOUNT OF PROVISIONS TOWARDS FOREIGN EXCHANGE LOSSES RESULTING FROM FOREIGN EXCHANGE DERIVATIVES LOSS ON FORWARD C ONT R ACT CONTENDING THAT THE SAME WERE ENTERED INTO FOR HEDGING AGAINST RISKS ARISING FROM EXPOSURE TO FOREIGN CURRENCY FLUCTUATION, SINCE THE ASSESSEE COMPANY PROVIDES SERVICES TO ITS OVERSEAS CUSTOMERS AND INVOICES ARE RAISED IN FOREIGN CURRENCY, WHEREAS THE AO DISALLOWED THE CLAIM TREATING THE SAME AS A SPECULATIVE LOSS, AS ALSO CONTINGENT SINCE A PROVISION HAS BEEN MADE TOWARDS FORWARD CONTRACT REINSTATEMENT. 4 . 1 LEARNED CIT(A) FURTHER NOTED THAT THE ASSESSEE HAS ALSO BOOKED LOSSES ON ACCOUNT OF FOREIGN EXCHANGE LOSSES ON SUCH TRANSACTIONS AS ON THE DATE OF BALANCE SHEET WHICH HAVE BEEN ALLOWED TO IT. THE ITA NO. 484 /20 1 3 5 ASSESSEE HAS ALSO BOOKED LOSES AS PROVISION FOR FOREIGN EXCHANGE LOSS FOR THE VERY SAME TRANSACTIONS, BY ENTERING INTO FORWARD COVER CONTRACTS CLAIMING THAT HEDGING HAS BEEN ALSO DONE BY ENTERING INTO FOREIGN EXCHANGE FORWARD CONTRACT. LEARNED CIT(A) OBSERVED THAT F OR INCOME TAX PURPOSES, SPECULATIVE TRA NSACTION IS A CONTRACT WHERE THE TRANSACTION IS SETTLED, PERIODICALLY OR ULTIMATELY, OTHERWISE THAN BY ACTUAL DELIVERY OF THE COMMODITY OR TRANSFER OF THE COMMODITY OR SCRIPS. HEDGING CONTRACTS, IN ORDER TO BE OUT OF THE PURVIEW OF SPECULATIVE TRANSACTIONS, FOR AN ASSESSEE, WHO IS NEITHER A DEALER OR INVESTOR IN STOCKS AND SHARE, NOR IS A MEMBER OF THE FOR WARD MARKET OR A STOCK EXCHANGE, MUST BE IN RESPECT OF ONLY RAW MATERIALS OR MERCHANDISE ENTERED INTO IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS. THE HEDGING (FORWARD CONTRACT) IS NOT ENTERED INTO IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSI NES S. THE ACTIVITY OF THE ASSESSEE IS TO PROVIDE SERVICES AS AFOREMENTIONED, WHE REAS THE HEDGING (FORWARD CONTRACT) IS IN FOREIGN EXCHANGE. ACCORDINGLY, LEARNED CIT(A) HELD THAT THE AO WAS JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE. WHILE HOLDING SO, LEARNED CIT(A) HAS TAKEN INTO CONSIDERATION THE CBDT INSTRUCTION NO. 3 OF 2010 DATED 23 - 3 - 2010, WHICH HAS BEEN ISSUED REGARDING ALLOWABILITY OF LOSSES ON ACCOUNT OF FOREX DERIVATIVES. T HE D ECISION S OF THE HON BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. (SUPRA) AND THE DECISION OF THE SPECIAL ITA NO. 484 /20 1 3 6 BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA) , WERE FOUND DISTINGUISHABLE . 5 . THE AMOUNT DISALLO WED BY HOLDING SPECULATIVE LOSS WAS ALSO TAKEN INTO CONSIDERATION BY THE AO FOR THE PURPOSE OF COMPUTING BOOK PROFIT UNDER SECTION 115JB. THIS ACTION OF THE AO WAS ALSO CONFIRMED BY THE LEARNED CIT(A) . AGAINST THE ORDER OF LEARNED CIT(A) , NOW THE ASSESSEE IS IN APPEAL HERE BEFORE THE TRIBUNAL. 6 . LEARNED COUNSEL OF THE ASSESSEE FILED A BRIEF WRITTEN SUBMISSION. THE CONTENTION RAISED BEFORE THE LOWER AUTHORITIES WERE REITERATED. IT WAS EXPLAINED THAT THE ASSESSEE HAS CLAIMED THE LOSS ON ACCOUNT OF FOREIGN E XCHANGE FLUCTUATION. AS PER AS11, THE LOSS IS NOT SPECULATIVE ONE AS ON THE BASIS OF ACTUAL RATE OF FOREIGN CURRENCY HAS BEEN TAKEN INTO CONSIDERATION AND THEN ON THE BASIS OF CREDIT BALANCE OF DEBTOR WAS ACCOUNTED FOR BY TAKING THE CURRENT RATE OF THE FOR EIGN CURRENCY, AND, THEREFORE, IT CANNOT BE SAID THAT THE LOSS CLAIMED BY THE ASSESSEE IS SPECULATIVE IN NATURE. IT WAS FURTHER SUBMITTED THAT ON TRANSACTION COMPLETED DURING THE YEAR, THE LOSS HAS BEEN ALLOWED BY THE AO. THERE WAS A PROFIT ALSO WHICH HAS BEEN TAXED BY THE AO. THEREFORE, THE DISALLOWANCE OF LOSS TREATING THE SAME AS SPECULATIVE IN NATURE IS TOTALLY INCORRECT. THE LOSS WAS DETERMINED IN ACCORDANCE WITH AS 11 AND THE LOSS IS ALLOWABLE IN VIEW OF THE DECISION OF THE HON BLE SUPREME COURT IN T HE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. ITA NO. 484 /20 1 3 7 (SUPRA) BY WHICH THE DECISION OF THE SPECIAL BENCH HAS BEEN APPROVED BY THE H O N BLE SUPREME COURT. 6.1 REGARDING BOARD INSTRUCTION, IT WAS SUBMITTED BY LEARNED AR THAT THOSE ARE APPLICABLE IN THOSE CASES WHERE THE TRADING IN FOREX DERIVATIVES IS DONE BUT ASSESSEE IS NOT DOING ANY TRADING ACTIVITY. IT WAS ALSO SUBMITTED THAT THE BOARD INSTRUCTION MAY BE BINDING ON THE DEPARTMENTAL AUTHORITY BUT THEY ARE NOT BINDING ON THE APPELLATE AUTHORITIES. IT WAS FURTHER SU BMITTED THAT THESE ARE ASCERTAINED LIABILITY, THEREFORE, NO ADJUSTMENT IN THE DMAT ACCOUNT CAN BE DONE, THEREFORE, COMPUTING THE BOOK PROFIT UNDER SECTION 115J B IS ALSO NOT JUSTIFIED. 7 . LEARNED DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF THE AO AS WELL AS ON THE ORDER OF LEARNED CIT(A) . PARA 3.2 OF THE ORDER OF THE AO WAS ALSO READ. PARA 5 OF THE ORDER OF THE CIT(A) WAS ALSO READ. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS CLAIMED LOSS TWICE, WHICH IS CLEAR BY THE ORDER OF THE LEARNED CIT(A) . A TTENTION OF THE BENCH WAS AGAIN DRAWN ON PARA 5 OF THE ORDER OF THE LEARNED CIT(A) . IT WAS SUBMITTED THAT IF THE ASSESSEE CONTENTION IS CORRECT THAT THERE WAS NO DOUBLE CLAIM THEN IT SHOULD BE VERIFIED BY THE AO. IT WAS ALSO SUBMITTED THAT THE INSTRUCTION OF THE BOARD ARE ALSO REQUIRED TO BE EXAMINED. 8 . I HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THEM CAREFULLY. I HAVE ALSO GONE THROUGH THE CASE LAWS RELIED UPON BY THE LEARNED AR. AFTER CONSIDERING THE SUBMISSION AND PERUSING THE MATERIAL ITA NO. 484 /20 1 3 8 ON RECORD , I FOUND THAT THE MATTER NEEDS REVERIFICTION AT THE END OF THE AO. I ALSO NOTED THAT THE AOS MAIN REASON FOR DISALLOWING THE CLAIM OF LOSS ON ACCOUNT OF VALUATION OF THE AMOUNT ON THE BASIS OF RATE OF FOREIGN CURRENCY ON THE DATE OF SETTLEMENT I.E. THE DATE OF BALANCE PREPARED/REPORTING DATE. THE ASSESSEE COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND IMPLEMENTATION. THE ENTIRE REVENUE OF THE BUSINESS IS D ERI VE D FROM OVERSEAS CLIENT I.E. EXPORT OF SERVICES. IN ORDER TO HEDGE FOREIGN EXCHANGE EXPO SURE IN RESPECT OF OVERSEAS DEBTORS, THE ASSESSEE TAKES FORWARD CONTRACTS FROM BANKS. SINCE THE ASSESSEE IS A COMPANY, IT HAS TO MANDATORILY FOLLOW THE ACCOUNTING STANDARD (AS) NOTIFIED UNDER SECTION 211(3C) OF THE COMPANIES ACT, 1956. THE POLICY MAINTAI NED BY THE ASSESSEE HAS BEEN FOLLOWED YEAR AFTER YEAR BY THE ASSESSEE. IN ORDER TO HEDGE FOREIGN EXCHANGE EXPOSURE IN RESPECT OF OVERSEAS DEBTORS, THE ASSESSEE TAKES FORWARD CONTRACTS FROM BANKS AND THIS IS ALLOWED AS PER GOVERNMENT POLICY AS ALL THESE TR ANSACTIONS ARE DONE AFTER TAKING APPROVAL FROM THE APPROPRIATE AUTHORITIES. FORWARD CONTRACT ARE TAKEN BY THE ASSESSEE TO HEDGE/MITIGATE THE FOREX RISKS OF OUTSTANDING RECEIVABLES IS ALSO UNDISPUTED AS THERE IS NO OTHER PURPOSE OF THE ASSESSEE BECAUSE THE ASSESSEE IS INVOLVED IN EXPORT OF SERVICE ONLY. THE ASSESSEE HAS COMPLIED WITH AS11 AND ACCOUNTED FOR THE FOREX LOSS AND CLAIMED IT AS A DEDUCTIBLE EXPENDITURE. AFTER TAKING INTO CONSIDERATION THESE ASPECTS AS SUBMITTED ABOVE, I FOUND THAT THE AO HAS NOT C ONSIDERED ALL THESE ASPECTS WHILE DECIDING THE ISSUE OF LOSS ON ACCOUNT OF FOREIGN ITA NO. 484 /20 1 3 9 EXCHANGE. LEARNED COUNSEL OF THE ASSESSEE HAS STATED THAT THIS ISSUE HAS BEEN EXAMINED BY THE SPECIAL BENCH IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA) AND IN THE CASE O F M/S RELIANCE COMMUNICATIONS LIMITED, DECIDED IN ITA NO. 2915/MUM/2012 FOR ASSESSMENT YEAR 2007 - 08 VIDE ORDER DATED 5 - 2 - 2013 . IT WAS EXPLAINED BY LEARNED AR THAT THE LOSS SETTLED DURING THE YEAR UNDER CONSIDERATION AND THE PROFIT EARNED DURING THE YEAR UND ER CONSIDERATION HAVE BEEN ALLOWED BY THE AO HIMSELF, HOWEVER, THE AO HAS NOT ALLOWED THE LOSS DETERMINED AT THE DATE OF CLOSING OF THE YEAR . THIS FACT NEEDS VERI FICATION THAT IF ON SIMILAR TRANSACTION THE LOSS INCURRED BY THE ASSESSEE IN BETWEEN THE YEAR AND ALSO THE PROFIT EARNED BY THE ASSESSEE IN BETWEEN THE YEAR, THEN OF COURSE THE LOSS ARRIVED AT THE END OF THE YEAR, SHOULD HAVE ALSO BEEN ALLOWED. I ALS O NOTED THAT THE LEARNED CIT(A) IN HIS FINDING SOMEWHERE HAS RECORDED THAT THE ASSESSEE HAS CLAIMED DOUBLE DEDUCTION. THIS FACT ALSO NEEDS VERIFICATION AS LEARNED COUNSEL HAS VEHEMENTLY ARGUED THAT NO DOUBLE DEDUCTION HAS BEEN CLAIMED AND HE DOES NOT KNOW FROM WHERE THE LEARNED CIT(A) FOUND THAT THE ASSESSEE HAS CLAIMED DOUBLE DEDUCTION. 9 . IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THE MATTER SHOULD GO BACK TO THE FILE OF THE AO TO EXAMINE ALL THE FACTS ONCE AGAIN AND ALSO TAKE INTO CONSIDERATION VARIOUS CASE LAWS MENTIONED ABOVE AND AFTER PROVIDING REASONABLE OPPORTUNIT Y OF BEING HEARD TO THE ASSESSEE. SINCE I AM OF THE VIEW THAT THE ISSUE IN RESPECT ITA NO. 484 /20 1 3 10 OF BEING THE PROVISION FOR LOSS ON FORWARD CONTRACTS IS RESTORED TO THE FILE OF THE AO, THEN THE MATTER IN RESPECT OF DETERMINING THE BOOK PROFIT UNDER SECTION 115J B ALSO NE EDS TO BE DECIDED AFRESH. ACCORDINGLY, I SET ASIDE THE ORDER OF THE CIT(A) ON THE ISSUE INVOLVED AND RESTORE THE ISSUE TO THE FILE OF THE AO TO PASS A FRESH ORDER AS PER THE OBSERVATION MADE ABOVE. 1 0 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF AUG .2013 201 3 SD/ - ( ) ( R.K.GUPTA ) / JUDICIAL MEMBER MUMBAI ; DATED : 21/08 /2013 /PKM , PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) , MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// / BY OR DER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI