TMI Blog2015 (5) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of a particular case cover an amount which is a "loss" even though said amount has not been given from the pocket of the assessee. While dealing with the issue of the nature of forward contracts in commodity derivatives, the co-ordinate bench of the Tribunal in the case of Kotak Mahindra Investment Ltd. [2013 (7) TMI 355 - ITAT MUMBAI ] relating to A.Y. 2008-09, has observed that such type of forward contracts are not purely contingent in nature rather loss or profit is somewhat ascertainable in such type of contracts because of constant watch on daily market rates. The quantum of profit or loss though not actually ascertainable can be anticipated in view of the trends of the market. The difference between the predetermined price and market price is settled daily on mark-to-market basis. In such type of contracts, it is not the stock value which is subject matter of the contract rather the contract itself is the stock in trade. Contracts in such type of cases can be squared off before the arrival of actual performance of date of contract, as the profit and loss are calculated on daily basis and the margins are settled accordingly. We may further observe from the guidelin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory stand. Under such circumstances it is difficult to believe that the payment made by the assessee to AASL for the services obtained was excessive or that it was not relating to the business of the assessee. This ground is accordingly allowed in favour of the assessee. Disallowance of sharing of common marketing expenses - As per the agreement, the assessee has been made liable to pay 60% of the expenses incurred by the VGIL in market/promotion of the products. It is not a case of reimbursement of actual expenses incurred by the VGIL on behalf of the assessee. Whereas it is a case of composite agreement as per which the assessee has been made liable to pay 60% of the total and expenses incurred by the VGIL for marketing of its own products and that of assessee, which means that the assessee has been paying service charges to the VGIL who has been providing marketing services to the assessee. Further, it has been specifically provided in clause 8 of the agreement that the VGIL shall at all times be an independent contractor and nothing contained in the agreement shall in any way imply employer-employee relationship, principal agent relationship or a commercial-agent relationshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Ground no 1 of the original ground of appeal the CIT (A) erred in observing that it is the finding given by learned AO that booking and cancellation of forward contracts of exchange were not in respect of specified export or import orders whereas actually the forward coverage was taken by the appellant against the export receivable. (Page 18 Para 5.2.21 of the CIT(A) order) 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in dismissing ground no 2 raised before CIT(A) on the ground that the appellant has not pressed this ground. 3. Without prejudice to Ground No 4 of the original grounds of appeal the learned CIT(A) erred in stating that the learned AR has admitted that it had deducted tax at source while making payment to M/s Anand Automotive Systems Limited, but the appellant failed to deduct tax at source while making payments to M/s Victor Gaskets India Limited. 4. Without prejudice to Ground No 4 of the original grounds of appeal the learned CIT(A) erred in not holding that the payment made to M/s Victor Gaskets India Limited on account of share of common marketing expenses are reasonable and are incurred wholly and exclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctuation risk in respect of export proceeds is excluded from the scope of speculative transactions. On the other hand the Ld. DR has relied upon the findings of the lower authorities. 5. We have considered the rival submissions. We find that the issue relating to mark to market loss in forward contracts in foreign exchange has come up for consideration before the coordinate bench of this Tribunal and has been decided vide order dated 12.2.2014 in the case of ACIT Vs. M/s S. Rajiv CO. ITA NO. 7095/Mum 2012, wherein the Tribunal has made the following observations: 4. Before us, it has been submitted that this issue had come up for consideration in series of decisions of the co -ordinate bench of the Tribunal. Strong reliance was placed on the latest decision of the Tribunal, Mumbai Bench, in London Star Diamond Co. India Pvt. Ltd. v/s DCIT, ITA no.6169/Mum./2012, order dated 11th October 2013. The relevant conclusion of the Tribunal is as under:- 35. x x x x (a) Loss on cancellation of Matured FCs amounting to ₹ 4,14,88,805 relates to the FCs cancelled or terminated on or after the due date. In other words, the FCs booked as integral part of the export in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by the Revenue is treated as dismissed. 6. It may be further observed that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. (2009) 179 Taxman 326, while dealing with the question as to whether the additional liability arising on account of fluctuation in the rate of exchange can be allowed to be adjusted pending actual payment of the varied, has observed that expenditure as used in section 37 in Income Tax Act may in the circumstances of a particular case cover an amount which is a loss even though said amount has not been given from the pocket of the assessee. 7. While dealing with the issue of the nature of forward contracts in commodity derivatives, the co-ordinate bench of the Tribunal in the case of DCIT vs. Kotak Mahindra Investment Ltd. relating to A.Y. 2008-09,[(2013) 59 SOT 4; 35 taxmann.com 225 (Mumbai-Trib.)] ( judicial member of the bench being party to that order also) has observed that such type of forward contracts are not purely contingent in nature rather loss or profit is somewhat ascertainable in such type of contracts because of constant watch on daily market rates. The quantum of profit or loss though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident in India may enter into a forward contract with an authorised dealer in India to hedge an exposure to exchange risk in respect of a transaction for which sale and/or purchase of foreign exchange is permitted under the Act, or rules or regulations or directions or orders made or issued there under, subject to following terms and conditions) the authorised dealer through verification of documentary evidence is satisfied about the genuineness of the underlying exposure, b) the maturity of the hedge does not exceed the maturity of the underlying transaction, c) the currency of hedge and tenor are left to the choice of the customer, d) where the exact amount of the underlying transaction is not ascertainable, the contract is booked on the basis of a reasonable estimate, e) foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank where such approval is necessary, f) in case of Global Depository Receipts (GDRs) the issue price has been finalised, g) balances in the Exchange Earner's Foreign Currency(EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e set aside and the issue is restored back to the file of the AO to decide the same accordingly after giving proper opportunity to the assessee to represent its case. Ground No. 2 Additional Ground No.2: Disallowance of foreign exchange loss on cancellation of forward contracts of ₹ 194000/- : 12. The Ld. AR of the assessee has stated at Bar that as per instructions of his clien, he does not press this Ground. He has also signed on the memo of Grounds of appeal in this respect. We also find from the record that this ground has not been pressed by the asessee before the Ld. CIT(A) also. Ground No. 2 is therefore dismissed being not pressed. 13. Ground No.3:Disallowance of Professional fees paid to Anand Automotive Systems Ltd. INR 34,78,043 being 20% of INR 1,72,90,218 as not being incurred wholly and exclusively for the purpose of business : While scrutinizing the expenses of the assessee, the AO noticed that the assessee had claimed a sum of ₹ 1,23,90,218/- as professional fees paid to one of its sister concern M/s. Anand Automotive Systems Limited. The AO asked the assessee to justify the same. In response, the assessee replied that the it had paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the lower authorities. 15. We have considered the rival contentions. The AO in the case in hand has disallowed the expenditure incurred/paid to AASL being excessive or not relating to the business activitiy of the assessee, the department on the other hand had made the additions in the hand of AASL on the ground that the income/ consideration for services provided by AASL to the assessee in this case was less and therefore adhoc addition had been made in the case of AASL. Thus the department has taken a contradictory stand. Under such circumstances it is difficult to believe that the payment made by the assessee to AASL for the services obtained was excessive or that it was not relating to the business of the assessee. This ground is accordingly allowed in favour of the assessee. 16. Ground No.4; Additional Ground No. 3, 4 5: Disallowance of sharing of common marketing expenses with Victor Gaskets India Limited INR 1,44,78,000 u/s.40(a)(ia) and without prejudice, 20% disallowed as not being incurred wholly and exclusively for the purpose of business : The AO also noticed that the appellant had paid a sum of ₹ 1,44,78,000/- to M/s. Victor Gaskets India Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been further contended that the said expenses had been incurred wholly and exclusively for the purpose of business and therefore, the same should be allowed entirely. Even the CIT(A) had deleted the disallowance of identical expenses in the earlier assessment year- AY 2008-09, which has been further confirmed by the ITAT by rejecting the Department s appeal ITA No. 2350/M/2012. 18. We have considered the rival contentions of both the parties. We find that the copy of the service agreement of the assessee with Victor Gaskets India Ltd. has been placed on paper book file at page No.104. We have perused the said agreement. We find that the assessee has entered into a specific agreement of service with VGIL and it has been agreed that the VGIL will provide to the assessee the marketing services all over India besides that it will handle mechanic service/sale promotion/Van campaign etc. activities on behalf of the assessee. It may be noted that whereas VGIL is engaged in the manufacture and sale of gaskets and whereas the assessee is engaged in manufacture and sale of pastern rings, semi finished castings and lapping sleeves. The said VGIL had agreed to provide the services as detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, 68[has not been paid on or before the due date specified in sub-section (1) of section 139 :] 69[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :] 70[Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amend the provisions to give it a different meaning and further that the newly inserted proviso under such circumstances is prospective in nature i.e. w.e.f. 01.04.13 and cannot be applied retrospectively. 21. The Ld. A.R. of the assessee has brought to our notice that the issue relating to operation of the newly inserted proviso whether prospective or retrospective in nature has already been considered and decided by the coordinate Bangalore bench of the Tribunal in the case of Shri S.M. Anand Vs. ACIT in ITA No.183/Bang./13 for A.Y. 2005-06 vide order dated 21.02.14. The relevant part of the findings of the Tribunal given in the said case, are reproduced as under: 3.4.1 We have heard the rival submissions and perused and carefully considered the material on record. Admittedly, the assessee has not deducted tax at source on the payments made to Sri G.Shankar of ₹ 2,69,21,500 and to Sri Ramesh Kotian of ₹ 1,54,75,000. As pointed out by the learned Authorised Representative as far as the payments made to the aforesaid two persons is concerned the fact that the said payees / recipients have shown the said amounts in their respective books of account and profit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,21,500 and to Sri Ramesh Kotiar, of ₹ 1,54,75,000 after affording the assessee adequate opportunity to file Form No.26A and only after due verification of whether the aforesaid two payees / recipients have reflected the same receipts in their books of account and have offered the some to tax. In these circumstances, we hereby set aside the order of the learned CIT (Appeals) to the file of the Assessing Officer only for the limited purpose as directed above. 22. We agree with the above finding of the co-ordinate bench of the Tribunal and respectfully following the same, we hold that disallowance under section 40(a)(ia) of the Act will not be attracted, if the respective payee has paid the required taxes in accordance with law. For verification of the actual position, we restore this issue to the file of the AO to verify whether the VGIL had paid the due taxes after computation of its income including the payments received from the assessee. This issue is accordingly allowed for statistical purposes. 23. So far the issue relating to the adhoc disallowance @20% of the expenses is concerned, we do not find any justification for the same on the part of the lower authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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