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2014 (11) TMI 284 - AT - Income TaxUnrealized loss on the commodity derivatives - Regular method of accounting followed by assessee – Held that:- While anticipated profit for forward contracts are not taken into account but anticipated losses are duly taken into account in computation of business profits – in DCIT v. Bank of Bahrain & Kuwait [2010 (8) TMI 578 - ITAT, MUMBAI] – it has been held that binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts - a consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted - The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on 31st March - A liability is said to have crystallised when a pending obligation on the balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing - As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period - The forward foreign exchange contracts have all the trappings of stock-in-trade - where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. Even when loss has not yet crystallized, a deduction is to be granted in respect of a reasonably anticipated loss - Since the provisions for anticipated losses are reversed in the beginning of the next year, these deductions are completely tax neutral and the impact is confined to the timing of deduction - there cannot be a double deduction of the same loss- first one at the end of this accounting period and second one at the point of time when the transaction is finally settled - as long as the assessee has reversed this provision in the beginning of next year and thus effectively adjusted this loss against loss or profit finally realized commodity derivatives, no objection can be taken to this claim – thus, the matter is remitted back to the AO – Decided in favour of assessee. Transfer pricing adjustment – Determination of ALP - Service received or benefit and/or services received duplicate in nature or not – Held that:- The very foundation of the action of the TPO is thus devoid of legally sustainable merits - the payments are made under an arrangement with the AE to provide certain services - it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions - as for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period - The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered - As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee - the services were actually rendered under the agreement and the services did justify the payments - in the absence of prerequisites for application of CUP methods being absent, it was not open to the TPO to disregard the TNMM employed by the assessee - No defects have been pointed out in application or relevance of TNMM in this case – the order of the TPO is set aside –Decided in favour of assessee.
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