Assistant Commissioner of Wealth Tax Circle-6(3)(1), Bangalore V. Sri M r Janakiram(HUF) , Bangalore

WTA 27/BANG/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5961 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 01-05-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 30-08-2018
• Assessment Year: 2008-2009
• Appeal Filed On: 26-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS LAKSHMI KARTHIK
• Assessee Lawyers: G R REDDY
• Keywords: Capital asset; Transfer pricing; International transaction; Additional evidence; Question of law; Wholly owned subsidiary; Capital expenditure; Set aside
• Section: 143(3); 43(5); 37

Judgement Text

1 IT(TP)A NO.20/BANG/2014 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER I.T. (T.P) A. NO. 20/BANG/2014 (ASSESSMENT YEAR : 20 09 - 10 ) M/S. KOMET PRECISION TOOLS PVT. LTD., NO.16J, ATTIBELLE INDL. AREA, BANGALORE - 560 107. . APPELLANT. VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. .. RESPONDENT. APPELLANT BY : MRS. LAKSHMI KARTHIK, CA RESPONDENT BY : SHRI G.R. REDDY, CIT (DR) (ITAT) - 1, BENGALURU. DATE OF HEARING : 10.07.2017. DATE OF PRONOUNCEMENT : 31 .08 .201 7 . O R D E R PER SHRI VIJAY P AL RAO, J.M . : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DT. 28.11.2013 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') IN PURSUANT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (IN SHORT DRP ) DT. 19.11.2013 FOR THE ASSESSMENT YEAR 200 9 - 10 . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : 2 IT(TP)A NO.20/BANG/2014 3 IT(TP)A NO.20/BANG/2014 4 IT(TP)A NO.20/BANG/2014 3. GROUND N OS.1 TO 4 ARE GENERAL IN NATURE AND HAVE NOT BEEN PRESSED BY THE ASSESSEE. ACCORDINGLY, NO SPECIFIC ADJUDICATION IS REQUIRED. 4. GROUND NOS.5 & 6 ARE REGARDING TRANSFER PRICING ADJUSTMENT . 5 . THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF HIGH TECHNOLOGY PRECISION CUTTING TOOLS. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF KOMET GROUP GMBH , GERMANY. THE FINANCIAL RESULTS AND INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE ARE REPRODUCED BY THE TRANSF ER PRICING OFFICER (TPO) IN PARAS 2.2 & 2.3 AS UNDER : 5 IT(TP)A NO.20/BANG/2014 2.3 INTERNATIONAL TRANSACTIONS (AS MENTIONED IN THE 92CE REPORT) A. PURCHASE OF RAW MATERIALS AND CONSUMABLES. RS.3,68,15,197 B. PURCHASE OF TRADED GOODS RS.11,25,80,969. C. PAYMENT OF MANAG EMENT AND SUPPORT SERVICE RS.5,94,761. D. PAYMENT OF ROYALTY RS.33,62,711. THUS THE ASSESSEE HAS ENTERED INTO THE INTERNATIONAL TRANSACTIONS IN TWO SEGMENTS VIZ. MANUFACTURING AND TRADING OF PRECISION CUTTING TOOLS. THE TPO ACCEPTED THE MANUFACTURING S EGMENT TRANSACTION OF THE ASSESSEE AT ARM S LENGTH AND THEREFORE THE DISPUTE INVOLVED IN THIS APPEAL IS ONLY WITH RESPECT TO THE TRADING SEGMENT. THE ASSESSEE IS IMPORTING THE GOODS FROM ASSOCIATED ENTERPRISES (AES) AND RESELLING THE SAME IN THE DOMESTIC MARKET. THE ASSESSEE HAS APPLIED RESALE PRICE METHOD (RPM) AS MOST APPROPRIATE METHOD (MAM) FOR BENCH MARKING ITS TRANSACTIONS. THE TPO REJECTED THE RPM APPLIED BY THE ASSESSEE AND INSTEAD APPLIED TNMM AS MAM. 6 IT(TP)A NO.20/BANG/2014 6. THE LEARNED AUTHORISED REPRES ENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE TPO HAS ACCEPTED THE RPM AS MAM FOR THE SUBSEQUENT ASSESSMENT YEAR AND THEREFORE ONLY FOR THE YEAR UNDER CONSIDERATION THE TPO HAS REJECTED THE RPM AS MAM WHICH IS NOT JUSTIFIED WHEN NO DISTINGUISHING FACTS EXIST FOR THE YEAR UNDER CONSIDERATION. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF ITO VS. LOREAL INDIA PVT. LTD. 276 CTR 484. THE LEARNED AUTHORISED REPRESENTATIVE THUS CONTENDED THAT HE ASSESSEE IS PURCHASING FINISHED GOODS FROM AE AND RESALE TO UNRELATED PARTY WITHOUT ADDING ANY VALUE IN THE PRODUCT. THEREFORE THE RESALE PRICE METHOD IS ONE OF THE PRESCRIBED METHOD UNDER THE TP RULES AND IS APPROPRIATE IN THE FACTS AND CIRCUMSTANCES O F THE CASE. HE HAS REFERRED TO THE TPO ORDER FOR THE ASSESSMENT YEAR 2011 - 12 WHEREIN THE TPO VIDE ORDER DT.27.01.2015 HAS ACCEPTED THE TP STUDY ANALYSIS OF THE ASSESSEE BASED ON THE RPM. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS CONTENDED THAT TH E TPO IS NOT JUSTIFIED IN REJECTING THE METHOD WHEN THIS METHOD WAS ACCEPTED IN THE SUBSEQUENT ASSESSMENT YEAR. 7. ON THE OTHER HAND, THE LEARNED CIT DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSEE IS A TRADER AND NOT THE DISTRIBUTOR THER EFORE THE DECISION RELIED UPON BY THE ASSESSEE IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. HE HAS FURTHER CONTENDED THAT IN THE 7 IT(TP)A NO.20/BANG/2014 SUBSEQUENT ASSESSMENT YEAR, THE TPO HAS NOT DISCUSSED THE ISSUE OF MAM AND THEREFORE IT CANNOT BE APP LIED AS A RES JUDICATA ON THIS ASSESSMENT YEAR. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. THE ASSESSEE IN THE TRADING SEGMENT IS IMPORTING THE GOODS FROM ITS AE AND SELLING THE SAME TO THE THIRD PARTY WITHOUT ANY VALUE ADDITION. THIS FACT OF SELLING THE GOODS IMPORTED FROM THE AE WITHOUT ANY VALUE ADDITION HAS NOT BEEN DISPUTED BY THE REVENUE BEFORE US. FURTHER IT IS ALSO NOT IN DISPUTE THAT FOR THE ASSESSME NT YEAR 2011 - 12, THE TPO HAS ACCEPTED THE RPM AS MAM FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS IN TRADING SEGMENT. THEREFORE THE TPO OUGHT TO HAVE BEEN M AINTAINED THE CONSISTENCY AND FINALITY OF THE MATTER WHILE DECIDING THE ISSUE OF M AM TO BE APPLIED FOR THE PURPOSE OF DETERMINING THE ALP WHEN THE FACTS RELATING TO THE ISSUE ARE IDENTICAL FOR THE YEAR UNDER CONSIDERATION AS WELL AS FOR THE ASSESSMENT YEAR 2011 - 12. NEITHER THE TPO NOR THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS POINTE D OUT ANY DISTINGUISHING FACTS TO JUSTIFY THE REJECTION OF RPM AS MAM WHEN THE SAME METHOD HAS BEEN ACCEPTED BY THE TPO FOR THE ASSESSMENT YEARS 2011 - 12 & 2013 - 14. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF ITO VS. LOREAL INDIA PVT. LTD. (SUPRA) WHILE C ONSIDERING THE ISSUE HAS HELD IN PARA 7 AS UNDER : 8 IT(TP)A NO.20/BANG/2014 7. AFTER HAVING PERUSED THE RELEVANT PART OF THE ORDER PASSED BY THE COMMISSIONER AND THE TRIBUNAL ON THIS QUESTION, WE ARE IN AGREEMENT WITH MR. PARDIWALLA THAT THE TRIBUNAL DID NOT COMMIT ANY ERROR O F LAW APPARENT ON THE FACE OF THE RECORD NOR CAN THE FINDINGS CAN BE SAID TO BE PERVERSE. THE TRIBUNAL HAS FOUND THAT THE TPO HAS PASSED AN ORDER EARLIER ACCEPTING THIS METHOD. THE TRIBUNAL HAS NOTED IN PARA 19 OF THE ORDER UNDER CHALLENGE THAT THIS METHOD IS ONE OF THE STANDARD METHOD AND THE OECD (ORGANIZATION OF ECONOMIC COMMERCIAL DEVELOPMENT) GUIDELINES ALSO STATE IN CASE OF DISTRIBUTION OR MARKETING ACTIVITIES WHEN THE GOODS ARE PURCHASED FROM ASSOCIATED ENTITIES AND THERE ARE SALES EFFECTED TO UNRELA TED PARTIES WITHOUT ANY FURTHER PROCESSING, THEN, THIS METHOD CAN BE ADOPTED. THE FINDINGS OF FACT ARE BASED ON THE MATERIALS WHICH HAVE BEEN PRODUCED BEFORE THE COMMISSIONER AS ALSO THE TRIBUNAL. FURTHER, IT WAS HIGHLIGHTED BEFORE THE COMMISSIONER AS ALSO THE TRIBUNAL THAT THE RPM HAS BEEN ACCEPTED BY THE TPO IN THE PRECEDING AS WELL AS SUCCEEDING ASSESSMENT YEARS. THAT IS IN RESPECT OF DISTRIBUTION SEGMENT ACTIVITY OF THE ASSESSEE. IN SUCH CIRCUMSTANCES, AND WHEN NO DISTINGUISHING FEATURES WERE NOTED BY T HE TRIBUNAL, IT DID NOT COMMIT ANY ERROR IN ALLOWING THE ASSESSEE'S APPEAL. SUCH FINDINGS DO NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. THE APPEAL IS DEVOID OF MERITS AND IS, THEREFORE, DISMISSED. THERE WOULD BE NO ORDERS AS TO COSTS. THUS WHEN THE TPO H AS BEEN CONSISTENTLY ACCEPTED THE RPM AS MAM FOR THE ASSESSMENT YEAR 2011 - 12 AS WELL AS FOR THE ASSESSMENT YEAR 2013 - 14 THEN REJECTI ON OF THE SAME FOR THE YEAR UNDER CONSIDERATION ALONE IS NOT JUSTIFIED. ACCORDINGLY, WE DIRECT THE TPO TO EXAMINE THE ISSUE OF ALP BY ACCEPTING THE RPM AS MAM. 9. GROUND NO.7.1 IS REGARDING DISALLOWANCE OF RS.22,15,835 AS CAPITAL IN NATURE. 10. THE ASSESSEE CLAIMED THE INTEREST EXPENDITURE OF RS.22,15,835 ON EXTERNAL COMMERCIAL BORROWINGS FROM ITS GROUP COMPANIES. THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE LOAN WAS TAKEN FOR ACQUIRING THE LAND WHICH IS A CAPITAL ASSET AND THEREFORE IT HAS TO BE PART OF THE COST OF THE LAND. THE ASSESSING OFFICER HAS APPLIED PROVISO TO SE CTION 36(1)(VIII) OF THE ACT AND HELD THAT THE LOAN WAS TAKEN FOR THE PURPOSE 9 IT(TP)A NO.20/BANG/2014 OF ACQUIRING LAND AND INTEREST ON THE SAID LOAN IS NOT AN ALLOWABLE DEDUCTION TILL SUCH ASSET WAS FIRST PUT TO USE. THE DRP CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER. 11. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE ASSET IN QUESTION IS NOT A PLAIN LAND BUT WITH AN INDUSTRIAL FACTORY SHED AND SERVANT ROOM . THE BUILT UP AREA OF INDUSTRIAL SHED WA S 4,200 SQ. FT. AND THE SERVANT ROOM W AS 300 SQ. FT. HE HAS REFERRED TO THE SALE DEED VIDE WHICH THIS INDUSTRIAL LAND WAS PURCHASED. HE HAS FURTHER CONTENDED THAT ANY SHORTAGE OF SPACE IN THIS E XISTING PREMISES THE ASSESSEE STARTING USING THE INDUSTRIAL SHED FOR EXECUTION OF THE PROJECT IMME DIATELY UPON THE ACQUISITION OF THE PROPERTY. THE LEARNED AUTHORISED REPRESENTATIVE HAS FURTHER CONTENDED THAT THE ASSESSEE HAS INCURRED ELECTRICITY CHARGES F R O M THE DAY IT BOUGHT THE PROPERTY AND THIS IS EVIDENT FROM THE ELECTRICITY BILL, FILED IN PAPER BOOK 2. THE LEARNED AUTHORISED REPRESENTATIVE HAS FURTHER SUBMITTED THAT THE EVIDENCES IN SUPPORT OF THE ASSET BEING USED FOR THE BUSINESS PURPOSE OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION WAS NOT PRODUCED BEFORE THE AUTHORITIES BELOW AND THE REFORE THE ASSESSEE HAS FILED A PETITION UNDER RULE 27 OF TRIBUNAL RULES FOR ADMISSION OF THE ADDITIONAL EVIDENCE. THUS HE HAS PLEADED THAT THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE BEING WATER CHARGES AS WELL AS ELECTRICITY CHARGES MAY BE ADMITTED I N SUPPORT OF THE CLAIM OF THE ASSESSEE THAT THE 10 IT(TP)A NO.20/BANG/2014 PREMISES IN QUESTION WAS USED BY THE ASSESSEE. HE HAS FURTHER SUBMITTED THAT EVEN OTHERWISE WHEN THE ASSESSEE HAS PURCHASED AN INDUSTRIAL SHED AS IT WAS READY FOR USE FOR THE PURPOSE OF BUSINESS OF THE ASSES SEE THEN THE INTEREST PAID ON THE LOAN FOR ACQUIRING THE SAID SHED CANNOT BE DISALLOWED BY INVOKING THE PROVISO TO SECTION 36(1)(III) . IN SUPPORT OF HIS CONTENTION, HE HAS RELIED U P ON VARIOUS DECISIONS OF THIS TRIBUNAL. THE LEARNED AUTHORISED REPRESENT ATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE LOAN TAKEN FOR THE PURPOSE OF ACQUIRING THE INDUSTRIAL SHED DOES NOT T A NTAMOUNT TO EX PANSION OF EXISTING BUSINESS AS ENVISAGED IN THE PROVISO TO SECTION 36(1)(III) OF THE ACT FOR DISALLOWANCE OF INTEREST UNDER THE LAW AS EXISTED FOR THE ASSESSMENT YEAR 2009 - 10. 12. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAS FAILED TO ESTABLISH THE ACTUAL USE OF THE ASSET IN QUESTION . FURTHER THE WATER BILL AND ELECTRICITY BILL D O NOT SHOW ANY CONSUMPTION OF WATER AND ELECTRICITY. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE ASSESSEE AVAILED THE ECB LOAN FROM ITS GROUP COMPANIES FOR PURCHASE OF INDUSTRIAL LAND IN QUESTION. THE ASSESSEE HAS CLAIMED THAT THE ASSET IN QUESTION IS AN INDUSTRIAL SHED AND NOT A PLAIN LAND. FURTHER THE ASSESSEE CLAIMED TO HAVE USED THE INDUSTRIAL SHED FOR ITS MANUFAC TURING PURPOSE AND THEREFORE THE ASSET WAS USED FOR THE BUSINESS 11 IT(TP)A NO.20/BANG/2014 PURPOSE OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. HENCE THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT THE PROVISO TO SECTION 36(1)(III) CANNOT BE APPLIED WH EN THE ASSESSEE HAS U S ED THE ASSET IN QUESTION JUST AFTER IT WAS ACQUIRED BY THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE HAS FILED THE DOCUMENTS RELATING TO WATER AND ELECTRICITY CONNECTION AND CONSUMPTION. SINCE THESE DOCUMENTS WERE NOT PRODUCED BEFO RE THE AUTHORITIES BELOW AND HAVE BEEN FILED AS ADDITIONAL EVIDENCE BEFORE THE TRIBUNAL THEREFORE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE INTEREST OF JUSTICE WE REMAND THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR EXAMINATION OF THE S AME BY CONSIDERING THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AND THEN TO DECIDE THIS ISSUE AS PER LAW. NEEDLESS TO SAY THE ASSESSEE BE AFFORDED AN OPPORTUNITY OF HEARING BEFORE DECIDING THE ISSUE. 14. GROUND NO.7. IS REGARDING DISALLOWANCE OF LOSS ON ACCOUNT OF CURRENCY DERIVATIVE. 15. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED INTEREST ON CERTAIN TRANSACTIONS. THE ASSESSEE PAID A SUM OF RS.13,75,837 TOWARDS INTEREST ON CURRENCY DERIVATIVE WHICH WAS DISALLOWED. THE ASSESSIN G OFFICER NOTED THAT THE ASSESSEE HAS INVOLVED IN FORWARD CONTRACT OF CURRENCY DERIVATIVE OF LOAN RECEIVED BY IT. ALTHOUGH THE ASSESSEE HAS SUBMITTED IT HAS ENTERED INTO FORWARD CONTRACT SPECIFICALLY TO MITIGATE THE RISK ON EXPOSURE TO 12 IT(TP)A NO.20/BANG/2014 ADVERSE FOREX FLUC TUATION H OWEVER , THE ASSESSING OFFICER DID NOT ACCEPT THIS EXPLANATION OF THE ASSESSEE AND HELD THAT THIS IS AKIN TO SPECULATIVE TRANSACTION UNDER SECTION 43(5) OF THE ACT. FURTHER THE ASSESSING OFFICER WAS OF THE VIEW THAT IT IS A LIABILITY WHICH HAS BE EN INCURRED BY THE ASSESSEE NOT IN THE COURSE OF BUSINESS AND THEREFORE LIABLE TO BE DISALLOWED UNDER SECTION 37 OF THE ACT. ACCORDINGLY THE ASSESSING OFFICER DISALLOWED RS.13,75,837 ON ACCOUNT OF INTEREST ON CURRENCY DERIVATIVE. THE ASSESSING OFFICER H AS ALSO TAKEN A VIEW THAT IN ANY CASE THIS EXPENDITURE HAS BEEN INCURRED IN RESPECT OF THE LOAN TAKEN BY THE ASSESSEE FOR PURCHASE OF FIXED ASSET AND THEREFORE IT IS NOT ALLOWABLE BEING A CAPITAL EXPENDITURE. 16. BEFORE US, THE LEARNED AUTHORISED REPR ESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE IMPUGNED LOSS OF RS.13,75,837 IS ARISING ON ACCOUNT OF INTEREST SWAPPING TRANSACTION. THE ASSESSEE IN THE EARLIER YEAR AVAILED ECB LOAN FROM ITS HOLDING COMPANY. IN ORDER TO MINIMISE THE RISK AGAINST TH E FLUCTUATING INTEREST RATE IT ENTERED INTO INTEREST SWAP ARRANGEMENT WITH D EUTSCHE BANK DURING THE PREVIOUS YEAR UNDER CONSIDERATION AND PAID A SUM OF RS.22,15,837 ON ACCOUNT OF SUCH ARRANGEMENT. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS CONTENDED TH AT IT IS AN ALLOWABLE CLAIM BEING A BUSINESS LOSS /EXPENDITURE FOR HEDGING OF RISK OF INTEREST RATE FLUCTUATION. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN 13 IT(TP)A NO.20/BANG/2014 THE CASE OF QUALITY ENGINEERING AND VS. DCIT 152 ITD 320. HE HAS ALSO RELIED UPON THE DECISION IN THE CASE OF ABN AMRO SECURITIES INDIA PVT. LTD. VS. ITO 133 ITD 343. 17. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUB MITTED THAT THIS ISSUE IS CONSEQUENTIAL TO THE ISSUE OF ALLOWABILITY OF INTEREST ON ECB LOAN AND THEREFORE IF THE CLAIM OF INTEREST IS DISALLOWED THEN THIS CLAIM ALSO REQUIRED TO BE DISALLOWED. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACT SPECIFICALLY TO MITIGATE THE RISK OF FLUCTUATING INTEREST RATE AND FOREX FLUCTUATION. AS PER THE CONTRACT ENTERED WIT H D EUTSCHE BANK, THE ASSESSEE PAID A SUM OF RS.13,75,837. THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF THE ASSESSEE ON ALTERNATIVE THREE GROUNDS : (I) THE TRANSACTIONS ARE SPECULATIVE IN NATURE (II) THE EXPENDITURE IS NOT INCURRE D FOR THE PURPOSE OF BUSINESS AND (III) IT WILL BE IN THE NATURE OF CAPITAL AS LOAN WAS TAKEN FOR ACQUISITION OF CAPITAL ASSET. 19. AS REGARDS THE CLAIM OF THE ASSESSEE WHICH WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROU ND OF SPECULATIVE IN NATURE AND NOT FOR THE 14 IT(TP)A NO.20/BANG/2014 PURPOSE OF BUSINESS OF THE ASSESSEE, WE FIND THAT WHEN THE ASSESSEE HAS ENTERED INTO A CONTRACT WITH THE BANK UNDER SWAP AGREEMENT TO MITIGATE ITS RISK TOWARDS THE LOSS DUE TO FLUCTUATION OF INTEREST RA TE AS WEL L AS FOREX FLUCTUATION THEN THE SAME CANNOT BE HELD AS SPECULATIVE IN NATURE AND FURTHER ONCE THE SWAP ARRANGEMENT IS MADE FOR MITIGATING THE LOSS IN RESPECT OF THE INTEREST PAYMENT AS WELL AS LOAN REPAYMENT THEN IT CANNOT BE CATEGORIZED AS AN EXPENDITURE NOT INCURRED IN THE COURSE OF BUSINESS. THE MUMBAI BENCHES OF THE TRIBUNAL IN THE CASE OF ABN AMRO SECURITIES INDIA PVT LTD VS. ITO (SUPRA) WHILE CONSIDERING AN IDENTICAL ISSUE HAS HELD IN PARAS 4 & 5 AS UNDER : 4. WE HAVE HEARD THE RIVAL CONTENTIO NS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 5. IT IS, TO BEGIN WITH, NECESSARY TO UNDERSTAND THE NATURE OF INTEREST RATE SWAP VALUATIONS. AN INTEREST RATE SWAP CONTRACT IS TYPICAL LY A CONTRACT BETWEEN TWO PARTIES WHICH DECIDE TO PAY INTEREST ON FIXED RATE, AS AGREED TO BETWEEN THE PARTIES, ON A NOTIONAL PRINCIPAL AMOUNT IN CONSIDERATION OF RECEIVING A FLOATING RATE OF INTEREST, OR VICE VERSA. IN PRACTICE, THESE OBLIGATIONS ARE SETT LED BY MAKING A NET PAYMENT, I.E. DIFFERENCE BETWEEN FIXED AND FLOATING RATE OF INTEREST. IF FIXED RATE OF INTEREST IS MORE THAN THE FLOATING RATE OF INTEREST, THE PERSON UNDER OBLIGATION TO PAY FIXED RATE OF INTEREST ONLY PAYS THE DIFFERENCE BETWEEN FIXED RATE AND FLOATING RATE, AND WHEN IT IS THE OTHER WAY ROUND, THE NET PAYMENT IS MADE BY THE PERSON UNDER OBLIGATION TO PAY THE FLOATING RATE OF INTEREST. THESE CONTRACTS ARE ENTERED INTO TO HEDGE AGAINST VARIATIONS IN FLOATING RATE OF INTEREST FROM TIME TO TIME. THE FLOATING RATE OF INTEREST IS INDICATED BY MIBOR (MUMBAI INTER BANK OFFER RATE), WHICH IS BENCHMARK INTEREST RATE FOR THE CALL MONEY MARKET, AND THE RATE AT WHICH BANKS CAN BORROW FUNDS, IN A MARKETABLE SIZE, FROM OTHER BANKS. LET US SAY ASSESSEE HAS AN OBLIGATION TO PAY FLOATING RATE OF INTEREST ON BONDS OF A VALUE OF RS 100 CRORES BUT, SINCE THE ASSESSEE PERCEIVES THE MARKETS AS VOLATILE AND NOT FIT FOR OPEN RISK BEING TAKEN, THE ASSESSEE HEDGES AGAINST THIS OBLIGATION BY ENTERING INTO AN INTERE ST RATE SWAP AT 4% WHICH HE FINDS REASONABLE AT THAT POINT OF TIME. THE FIXED RATE OF INTEREST IN SUCH CASES IS A NEGOTIATED RATE, WHILE FLOATING RATE OF INTEREST IS AT THE MERCY OF THE MARKET FORCES, WHEN MARKET EXPECTATIONS OF THE FLOATING INTEREST RATE IS LOW, THE AGREED FIXED RATE OF INTEREST UNDER THE SWAP CONTRACT RATE IS ALSO LOW. HOWEVER, MANY FACTORS AFFECT THE VARIABLE RATE AND THE RATES COULD MOVE EITHER WAY; IT IS THIS RISK OF SIGNIFICANT VARIATIONS IN THE FLOATING RATE WHICH IS SOUGHT TO BE MIT IGATED BY THE ASSESSEE BY ENTERING INTO INTEREST RATE SWAPS. FOR EXAMPLE, ON 30TH JUNE, ASSESSEE ENTERS INTO AN AGREEMENT WITH PARTY A TO PAY FIXED RATE OF INTEREST @ 4% ON A NOTIONAL PRINCIPAL AMOUNT OF RS 100 CRORES, IN CONSIDERATION OF RECEIVING FLOATIN G RATE OF INTEREST ON THE SAME, FOR A PERIOD OF ONE YEAR. THE SETTLEMENTS ARE 15 IT(TP)A NO.20/BANG/2014 TO BE DONE ON HALF YEARLY BASIS BEGINNING WITH 31ST DECEMBER OF THAT YEAR. THERE WILL BE NO CASH FLOWS AS ON THE DATE OF CONTRACTS, BUT, ASSUMING THAT FLOATING RATE OF INTEREST I S 4.50% ON 31ST DECEMBER, THE ASSESSEE WILL RECEIVE .50% INTEREST ON RS 100 CRORES FOR SIX MONTHS, AS ON THAT DATE. SIMILARLY, IF THE FLOATING RATE OF INTEREST AS ON 30TH JUNE OF THE FOLLOWING YEAR IS 3.75% THE ASSESSEE WILL PAY .25% INTEREST ON RS 100 CRO RES FOR SIX MONTHS ON THAT DATE. DEPENDING ON WHETHER THE AMOUNT IS RECEIVABLE OR PAYABLE UNDER THE INTEREST RATE SWAP CONTRACT, THE AMOUNTS ARE BOOKED AS INCOME OR EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT. THERE ARE NO ISSUES WITH REGARD TO THE INCOME S O DISCLOSED OR THE EXPENDITURE SO CLAIMED FOR DEDUCTION. ACCORDINGLY, WE DECIDE THIS ISSUE OF ALLOWABILITY OF THE CLAIM UNDER SWAP ARRANGEMENT IN FAVOUR OF THE ASSESSEE. 20. AS REGARDS THE DISALLOWANCE OF THE CLAIM BY TREATING THE SAME AS CAPITAL IN NATURE, WE FIND THAT THIS HAS A DIRECT NEXUS WITH THE ISSUE OF ALLOWABILITY OF THE INTEREST ITSELF ON THE LOAN TAKEN FOR THE PURPOSE OF ACQUIRING THE INDUSTRIAL SHED. SINCE THE SAID ISSUE HAS BEEN SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER, THE REFORE THIS ISSUE IS ALSO SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER FOR LIMITED PURPOSE OF DECIDING THE NATURE BEING CAPITAL OR REVENUE. 21. GROUND NO.7.3 IS REGARDING DISALLOWANCE OF CLAIM OF RS.29,16,000 ON ACCOUNT OF FLUCTUATION IN FOREI GN CURRENCY IN RESPECT OF ECB LOAN. 2 2 . THE ASSESSING OFFICER DISALLOWED THE CLAIM OF RS.29,16,000 ON ACCOUNT OF LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION REGARDING ECB LOAN ON THE GROUND THAT IT IS NOTIONAL LOSS AND CONTINGENT IN NATURE AND THEREFOR E IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. 16 IT(TP)A NO.20/BANG/2014 2 3 . BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT LOSS CALCULATED ON THE LAST DATE OF THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CON SIDERATION DUE TO FOREIGN CURRENCY FLUCTUATION IS NOT CONTINGENT OR NOTIONAL BUT IT IS AN ALLOWABLE CLAIM BEING LOSS DUE TO INCREASE IN THE LIABILITY OF THE ASSESSEE AS ON THE LAST DATE OF THE FINANCIAL YEAR. THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBM ITTED THAT THE ASSESSING OFFICER HAS ACCEPTED THAT THESE ARE MARK TO MARKET LOSSES COMPUTED AS ON THE PARTICULAR DATE WITH REFERENCE TO PREVAILING EXCHANGE RATE. HE HAS RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVE RNOR ( INDIA ) PVT. LTD. 312 ITR 254 AS WELL AS THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. WIPRO FINANCE LTD 351 ITR 153 AND SUBMITTED THAT SUCH LOSSES ARE NOT NOTIONAL. 2 4 . ON THE OTHER HAND, THE LEARNED DEPARTMENTAL RE PRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT IT IS ONLY A RESTATEMENT OF LIABILITY AS ON THE LAST DATE OF THE PREVIOUS YEAR AND THEREFORE IT IS NOT THE REAL LIABILITY TO BE PAID BY THE ASSESSEE AS THIS FOREIGN EXCHANG E RATES KEEPING ON FLUCTUATING AND THE ACTUAL LIABILITY HAS TO BE DETERMINED ONLY ON THE DATE OF REPAYMENT DEPENDING UPON THE EXCHANGE RATE ON THE SAID DATE OF PAYMENT. T HEREFORE THE RESTATEMENT OF LIABILITY BASED ON THE FOREIGN EXCHANGE FLUCTUATION AS ON THE LAST DATE CANNOT BE AN ALLOWABLE CLAIM. 17 IT(TP)A NO.20/BANG/2014 2 5 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS CLAIMED THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS ON THE LAST DATE OF THE FINANCIA L YEAR RELEVANT TO THE ASSESSMENT YEAR AND RESTATED ITS LIABILITY TOWARDS ECB LOAN. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE BEING NOTIONAL AND CONTINGENT. IT IS PERTINENT TO NOTE THAT IF THE ASSESSEE IS FOLLOWING CONSISTENTLY THIS METH OD OF ACCOUNTING FROM YEAR TO YEAR TO SHOW THE GAIN ON ACCOUNT OF FOREIGN EXCHANGE AS INCOME AND LOSS ON ACCOUNT OF FLUCTUATIO N OF FOREIGN EXCHANGE AS LOSS T HEN THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING THESE ENTRIES IN THE BOOKS BOTH LOSS AS WELL AS G AIN IN ACCORDANCE WITH THE ACCOUNTING STANDARD 11 CANNOT BE DISALLOWED. THEREFORE IF THE ASSESSEE HAS ADOPTED A FAIR AND REASONABLE SYSTEM OF ACCOUNTING IN RECASTING THE LOSS AS WELL AS INCOME ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF ECB LOAN LIABILITY AS ON THE LAST DATE OF THE FINANCIAL YEAR THEN THE CLAIM OF THE ASSESSEE CANNOT BE DISALLOWED BY TREATING THE SAME AS NOTIONAL OR CONTINGENT. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. WIPRO FINANCE LTD. (SUPRA) AFTER CONS IDERING THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR (INDIA) PVT. LTD. (SUPRA) HAS HELD IN PARAS 4 TO 6 AS UNDER : 4. THE VIEW TAKEN BY THE SUPREME COURT IN THIS JUDGMENT IS TO THE EFFECT THAT WHILE EVEN A NOTIONAL L OSS CAN BE CLAIMED BY WAY OF A BUSINESS LOSS AND AS A DEDUCTIBLE ITEM IN COMPUTING 18 IT(TP)A NO.20/BANG/2014 THE INCOME OF THE ASSESSEE FOR THE YEAR, AS IT IS A COMPUTATION ON NOTIONAL BASIS, IT IS MADE DEPENDENT ON THE MANNER OF CONDUCT OF THE ASSESSEE IN RESPECT OF THE EARLIER AS SESSMENT PERIOD AND PARTICULARLY AS TO THE ASSESSEE HAS BEEN FOLLOWING THIS UNIFORMLY OVER A PERIOD OF YEARS AND THE TEST BEING WHEN THERE WAS A NOTIONAL GAIN AS TO WHETHER IT HAD BEEN OFFERED FOR TAX ETC. THE SUPREME COURT TOOK THE VIEW THAT SUCH CLAIM CA N BE ENTERTAINED SUBJECT TO FULFILMENT OF THE FOLLOWING SIX CONDITIONS: ( I ) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS THE MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED B EFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; ( II ) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, W HETHER THE CHANGE WAS BONA FIDE ; ( III ) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; ( IV ) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACC OUNT BOOKS IN RESPECT OF LOSSES AND GAINS; ( V ) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; ( VI ) WHETHER THE SYSTEM ADOPTED BY THE A SSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 5. IN THE WAKE OF THIS JUDGMENT OF THE SUPREME COURT, IT IS NOW SUBMITTED THAT WHILE THE VIEW OF THE TRIBUNAL THAT THE ASSESSEE CAN CLAIM SUCH DEDUCTION H AS TO BE AFFIRMED, THE MATTER DOES NOT END WITH THAT, BUT SUCH CLAIM WILL HAVE TO BE EXAMINED IN THE LIGHT OF THE FULFILMENT OF THE CONDITIONS AS INDICATED BY THE SUPREME COURT, FOR WHICH PURPOSE, THE MATTER MAY HAVE TO GO BEFORE THE ASSESSING OFFICER, WHO HAS TO APPLY THIS TEST TO THE CLAIM MADE BY THE ASSESSEE AND THEN EITHER ADMIT THE CLAIM OR REJECT IT DEPENDING UPON THE ASSESSEE BEING IN A POSITION TO SATISFY THE FULFILMENT OF THE CONDITIONS. 6. IN VIEW OF THE JOINT SUBMISSION MADE BY BOTH COUNSEL, THE QUESTION IS APPARENTLY ANSWERED IN FAVOUR OF THE REVENUE, IN THE SENSE, THAT THOUGH THE VIEW OF THE TRIBUNAL IS TO BE AFFIRMED ON THE PRINCIPLE THAT BEING FURTHER MADE SUBJECT TO THE FULFILMENT OF THE CONDITIONS, THE MATTER HAS TO GO BACK TO THE ASSESSING OFFICER FOR EXAMINATION. IN THIS VIEW OF THE MATTER, THE APPEAL IS ALLOWED IN THESE TERMS. THE CLAIM OF THE ASSESSEE TO BE REEXAMINED BY THE ASSESSING OFFICER AND IN RESPECT OF THE ASSESSMENT YEAR APPLYING THE TEST OF FULFILMENT OF THE SIX CONDITIONS MENT IONED ABOVE. THE ASSESSING OFFICER TO ISSUE NOTICE TO THE ASSESSEE, FIXING A DATE OF HEARING THE ASSESSEE OR ITS COUNSEL AND THEN PASS ORDERS. ACCORDINGLY, IN VIEW OF THE ABOVE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT CITED SUPRA, WE DIRECT THE ASSE SSING OFFICER TO EXAMINE AND DECIDE THIS ISSUE IN 19 IT(TP)A NO.20/BANG/2014 THE LIGHT OF GUIDELINES/CONDITIONS AS ENUMERATED BY THE HON'BLE HIGH COURT. NEEDLESS TO SAY AN OPPORTUNITY OF HEARING TO THE ASSESSEE BE AFFORDED. 27. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 31ST DAY OF AUG., 201 7 . SD/ - ( JASON P BOAZ ) ACCOUNTANT MEMBER SD/ - (VIJAY PAL RAO) JUDICIAL MEMBER BANGALORE, DT. 31 .08.2017. *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL B ANGALORE.