ITO 15(2)(1), MUMBAI V. INVENTURUS KNOWLEDGE SERVICES P.LTD, MUMBAI

ITA 715/MUM/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 8938 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 11-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: CHOUDHARY ARUNKUMAR
• Assessee Lawyers: S C TIWARI; RITUJA PAWAR
• Keywords: Business income; Opportunity of being heard; Transactions in derivatives; Speculation loss
• Section: 10AA; 43(5)

Judgement Text

I IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ./ I.T.A. NO.715/ MUM/2016 ( / ASSESSMENT YEAR: 2011 - 12) ITO 15(2)(1) R.NO. 452, 4 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400020 / V. M/S. INVENTURUS KNOWLEDGE SERVICES PVT. LTD., 4 TH FLOOR, THE CORPORATE CENTRE, LBS MARG, MULUND (W), MUMBAI 400080. ./ PAN : AABCK4601P ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY: SHRI.CHOUDHARY ARUNKUMAR ASSESSEE BY : SHRI. S.C TIWARI & MS. RITUJA PAWAR / DATE OF HEARING : 07 - 08 - 2018 / DATE OF PRONOUNCEMENT : 10 - 10 - 2018 / O R D E R SHAMIM YAHYA, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST ORDER OF LEARNED CIT - A DATED 27.11.2015 AND PERTAINS TO ASSESSMENT YEAR 2011 2012 . 2. T HE GROUNDS OF APPEAL READ AS UNDER : - 1. 'THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN ALLOWING THE CLAIM OF EXEMPTION U/S. 10AA OF THE GAIN ON FOREIGN EXCHANGE DERIVATIVE TRANSACTIONS OF RS. 6,01,41,021/ - ' 2. 'THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE GAINS ON FOREIGN EXCHANGE DERIVATIVE TRANSACTION HAS DIRECT NEXUS AND DERIVED FROM TH E KPO SERVICES BUSINESS OF ASSESSEE AND THEREFORE ELIGIBLE FOR EXEMPTION U/S. 10AA.' I.T.A. NO.715/ MUM/2016 2 3. 'THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN HOLDING THAT THIS INCOME OF RS. 6,01,41,021/ - IS NOT SPECULATIVE I NCOME WITHOUT ACCORDING OPPORTUNITY TO VERIFY WHETHER THE TRANSACTIONS FULFILL CONDITIONS LAID DOWN IN THE PROVISION OF SECTION 43(5) READ WITH PROVISO (D) AND EXPLANATION (1) OF THE SECTION 43(5) OF THE I. T. ACT.' 4. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD AMEND OR ALTER ANY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 3. FROM THE ABOVE GROUNDS OF APPEAL I T TRAN SPIRES THAT THERE ARE TWO ISSUES ARISING IN THIS APPEAL . 4. THE FIRST ISSUE IS WHETHER THE GAIN OF FOREIGN EXCHANGE DE RIVATIVE TRANSACTION IS SPECULATIVE INCOME OR NOT. 5 . THE SECOND ISSUE IS WHETHER SUCH GAIN ON FOREIGN EXCHANGE DERIVATIVE TRANSACTION WOU LD QUALIFY FOR CLAIM OF EXEMPTION U/S. 10AA, BEING BUSINESS INCOME OF ASSESSEE AS KPO. 6 . BRIEF FA CTS OF THE CASE T HE ASSE SSEE IS ENGAGED IN THE BUSINESS OF PROVIDING KNOWLEDGE PROCESS OUTSOURCING SERVICES FROM STCZ AND IS ELIGIBLE FOR DEDUCTION U/S 10AA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND THAT THE ASSESSEE HAD EARNED RS.6,01,41,021/ - ON ACCOUNT OF GAIN ON FOREIGN CURRENCY DERIVATIVES CONTRACTS, THE SAME' WAS INCLUDED BY THE ASSESSEE IN THE PROFI TS ELIGIBLE FOR DEDUCTION U/S 10 AA. .SINCE THE FOREIGN EXCHANGE FLUCTUATION GAIN DID NOT HAVE ANY DIRECT NEXUS WITH - THE ACTIVITY OF PROVIDING KPO SERVICES FROM THE SEZ , THE SAME WAS PROPOSED TO BE TREATED AS SPECULATIVE INCOME BY THE ASSESSING OFFICER. 7 . BE FORE THE AO IT WAS CONTENDED THAT THE ASSESSEE IS ENGAGED IN PROVIDING BPO BUSINESS TO ITS CUSTOMERS LOCATED IN USA AND OTHER COUNTRIES AND THE EARNINGS ARE D ENOMINATED IN FOREIGN CURRENCY. IT WAS ALSO I.T.A. NO.715/ MUM/2016 3 CONTENDED THAT THE ASSESSEE HAD ENTERED IN TO FOREIGN CURRENCY DERIVATIVES CONTRACTS IN ORDER TO COVER UP FUTURE LOSSES WHICH MAY ARISE DUE TO FLUCTUATION IN FOREIGN CURRENCY RATES. SUCH TRANSACTIONS ARE CLAIMED TO BE COVERED BY EXCEPTIONS PROVIDED IN SECTION 43(5 ) A ND THEREFORE IT IS THE A SSESSEE'S ARGUMENT THAT PROFITS OR LOSS ARISING THERE FROM CANNOT BE REGARDED A S SPECULATIVE PROFIT OR LOSS. 8 . HOWEVER THE ASSESSING OFFICER WAS NOT CONVINCED HE HELD THAT, THE GAIN IS SPECULATIVE IN NATURE H E FURTHER HELD THAT SUCH DERIVATIVE CONTR ACTS ARE DISTINCT FROM THE CONTACT OF PROVIDING KPO SERVICES. HE HELD THAT THEREFORE, THE ASSESSEES CONTENTION THAT IT HAS PROXIMATE NEXUS WITH THE BUSINESS OF KPO SERVICES IS NOT CORRECT. 9. HE FURTHER HELD THAT NO SERVICES CAN BE SAID TO HAVE BEEN REND ERED WHICH BE CORRELATED WITH THE EXCHANGE FLUCTUATION GAIN. THERE WAS NO RENDERED CORRESPONDING TO THE GAIN ARISING ON DERIVATIVES CONTRACT FOREIGN CURRENCY. THEREFORE, GAIN ARISING ON SUCH DERIVATIVES TRANSACTION CANNOT BE HELD TO HAVE A DIRECT NEXUS WIT H THE ASSESSEES BUSINESS AND HENCE DOES NOT QUALIFY FOR DEDUCTION U/S. 10AA. 10 . AGAINST THE ABOVE ORDER ASSESSEE APPEAL BEFORE THE LD. CIT(A). 11 . THE LD. CIT(A) REFER RED TO THE ITAT DECISION IN ASSESSEES OWN CASE FOR AY 2009 - 10 WHEREIN ITAT HELD THAT LOSS INCUR RED ON DERIVATIVE TRANSACTION IN FOREIGN CURRENCY WAS NOT SPECULATIVE LOSS. ACCORDINGLY, LD. CIT(A) HELD THAT THE GAIN WAS NOT SPECULATIVE IN NATURE. 1 2 . AS REGARDS THE CLAIM THAT THE SAID GAIN ON F OREIGN EXCHANGE DERIVATIVE TRANSACTION QUALIFY FOR DEDUCTION U/S. 10AA AS ASSESSEE S KPO BUSINESS INCOME , T HE LD. CIT(A) REFER RED TO THE SAME ITAT DECISION FOR EARLIER YEAR . H E I.T.A. NO.715/ MUM/2016 4 NOTED THAT ONLY DIFFERENCE WAS THAT IN THE EARLIER PERIOD THERE WAS A BUSINESS LOSS EVEN AFTER DEDUCTING THE GAIN ARISING ON ACCOUNT OF DERIVATIVE CONTRACTS ON FOREIGN CURRENCY. THAT IN THE PRESENT APPEAL THERE BEING A POSITIVE INCOME EVEN AFTER REDUCING GAIN S ON ACCOUNT OF DERIVATIVE CONTRACTS OF FOREIGN CURRENCY, EXEMPTION U/S. 10A A HAS BEEN COMPUTED. HENCE HE HELD THAT FOLLOWING THE DECISION OF ITAT FOR AY 2010 - 11 HE WAS DECIDING THE ISSUE IN FAVOUR OF ASSESSEE. 1 3 . AGAINST THE ABOVE ORDER REVENUE APPEAL BEFORE US. 1 4 . WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS LD. DEPA RTMENTAL REPRESENTATIVE SUBMITTED THAT LD. CIT(A) HAS TOTALLY ERRED IN HOLDING THAT THE FOREIGN CURRENCY DERIVATIVE GAIN QUALIFY FOR DEDUCTION U/S. 10AA. HE SUBMITTED THAT THE ITAT ORDER REFERRED BY THE LD. CIT(A) WA S ONLY ON THE ISSUE WHETHER THESE GAINS ARE SPECULATIVE LOSS OR NOT. HE SUBMITTED THAT THIS CANNOT BE TREATED AS HOLDING BY THE ITAT THAT THESE LOSSES OR GAIN S W ERE QUALIFYING FOR EXEMPTION U/S . 10AA AS BUSINESS INCOME OF KPO BUSINESS . PER CONTRA LD. COUNSEL FOR THE ASSESSEE THOUG H FAIRLY AGREED THAT THE ABOVE REFERRED ITAT DECISION WAS NOT ON TH E ISSUE OF QUALIFICATION OF THIS INCOME AS INCOME QUALIFYING FOR EXEMPTION U/S. 10AA. HOWEVER, HE SUBMITTED THAT HE WAS RELYING UPON THE OBSERVATIO NS OF THE TRIBUNAL IN THIS CASE, W HICH SUPPORT THE CASE O F THE ASSESSEE. 15 . UPON CAREFUL CONSIDERATION WE FIND THAT THE ISSUE THAT WHETHER FOREIGN EXCHANGE DERIVATIVE TRANSACTIONS ARE SPECULATIVE INCOME OR NOT HAS ALREADY BEEN DECIDED BY THE ITAT IN FAVOUR OF THE ASSESSEE IN ITS ORDER DATED 21.10.2015 AY 2009 - 10. THE ITAT HAS CONCLUDED AS UNDER: - HENCE, WE ORDER THAT LOSS OF RS. 1,09,98,560/ - INCURRED BY THE ASSESSEE COMPANY ON THE CONTRACT FOR TRANSACTION IN UN - EXPIRED I.T.A. NO.715/ MUM/2016 5 CONTRACTS AS ON THE DATE OF BALANCE SHEET AS AT 31ST - MARCH 2009 IN DERIVATIVES IN FOREIGN CURRENCY COMPLIES WITH THE PROVISIONS OF SECTION 43(5) OF THE ACT READ WITH PROVISO (D) AND EXPLANATION 1 OF THE SECTION 43(5) OF THE ACT AND 'IS EXEMPT TO BE CATEGORIZED AS SPECULATION LOSS AND FURTHER HOLD THAT THE SAID LOSS AS : AT THE DATE OF FINANCI AL STATEMENT AS AT 31ST MARCH, 2009 ARISING DUE TO ADVERSE MOVEMENT IN EXCHANGE RATE BETWEEN UNITED STATES DOLLARS VIS - A - VIS IN RELATION TO INDIAN RUPEE AS ON THE DATE OF BALANCE SHEET AS AT 31ST MARCH 2009 IS NOT A NOTIONAL OR CONTINGENT LOSS RATHER IT I S A ASCERTAINED LIABILITY WHICH HAS CRYSTALLIZED ON THE DATE OF BALANCE SHEET AS AT 31ST MARCH, 2009 AND CAN BE COMPUTED WITH REASONABLE CERTAINTY AND ACCURACY, HENCE ALLOWABLE AS NON - SPECULATION LOSS. WE ORDER ACCORDINGLY 16 . FURTHER A S REGARDS THE ISSUE WHETHER THE FOREIGN EXCHANGE DERIVATIVE TRANSACTION QUALIFY AS ASSESSEES BUSINESS INCOME FROM KPO SERVICES ELIGIBLE FOR EXEMPTION U/S. 10AA WE ARE OF THE OPINION THAT THE TRIBUNAL IN ITS ABOVE ORDER WAS NEVER SEIZED WITH THIS ISSUE . H ENCE BY NO STRETCH OF IMAGINATION IT CAN BE SAID THAT THIS ISSUE IS COVERED BY THE SAID EARLIER ORDER. HENCE WE ARE OF THE CONSIDERED OPINION THAT LD. CIT(A) TOTALLY ERRED ON THIS ISSUE. HENCE I N OUR CONSIDERED OPINION THIS ISSUE NEEDS TO BE CONSIDERED A FRESH BY THE LD. CIT(A) BY A PROPER SPEAKING ORDER. THE LD. CIT(A) SHALL BEAR IN MIND REL EVANT LAW AND CASE LAW S INCLUDING THAT FROM HONBLE APEX COURT IN THE CASE OF LIBERTY INDIA LTD. VS CIT 317 ITR 218 AND THE CONSTITUTIONAL BENCH (S.C) DECISION IN THE CASE OF COMMISSIONER OF CUSTOMS VS DILIP KUMAR, ORDER DATED 20.07.2018 17 . NEEDLESS TO ADD ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARD. 18 . IN THE RESULT THIS APPEAL BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO.715/ MUM/2016 6 ORDER PRONOUNCED IN THE OPEN COURT ON 10 .10.2018 10 .10 .2018 SD/ - SD/ - (RAM LAL NEGI ) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 10 .10 .2018 NISHANT VERMA SR. PRIVATE SECRETARY COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CONCERNED, MUMBAI 4. THE CIT - CONCERNED , MUMBAI 5. THE DR BENCH 6. MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI