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2015 (5) TMI 40 - ITAT MUMBAI

2015 (5) TMI 40 - ITAT MUMBAI - TMI - Disallowance of foreign exchange loss on account of marking to mark to market of forward contracts - Disallowance of foreign exchange loss on account of forex derivative contracts - Business loss or Speculation loss - Disallowance of Professional fees - Disallowance of sharing of common marketing expenses u/s 40A(2)(b) - Held that:- Disallowance of loss on mark to market Forward Contracts - We find that the issue relating to mark to market loss in forward co .....

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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.

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 M .....

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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 guidelines issued by the Reserve Bank of India relating to general principles to be observed for forward foreign exchange contracts that th .....

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purpose of hedging of the anticipated loss resulting from such import-export business and not otherwise, if the assessee enters into a forward contract in foreign exchange, then such forward contracts are to be treated as integral part or incidental to the business of export/import and cannot be said to be the speculative contracts attracting the provisions of section 43(5) of the Act. The loss from such hedging transactions would be treated as business loss eligible to be set off against the pr .....

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hedge did not exceed the maturity of the underlying transaction. The findings of the CIT(A) given vide impugned order are therefore 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.

Disallowance of Professional fees - The AO in the case in hand has disallowed the expenditure incurred/paid to AASL being excessive or not relating to the business activity of the assessee, th .....

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e. 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 .....

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ip. These clauses in the agreement prove beyond doubt that the VGIL has been providing the services to the assessee as an independent contractor. Hence, the assessee was liable to deduct tax at source as per the provisions of chapter XVII-B of the Act and therefore disallowance was attracted in this case under section 40(a)(ia) of the Act.

Adhoc disallowance - So far the issue relating to the adhoc disallowance @20% of the expenses is concerned, we do not find any justification for th .....

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ndent : Shri Vivek A. Perampurna, D.R. ORDER Per Sanjay Garg, Judicial Member: The present appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-9 [hereinafter referred to CIT(A)], Mumbai, dated 09.10.2012 pertaining to A.Y. 2009-10. 2. The assessee has taken the following grounds of appeal. 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of AO of disallowance of foreign exchange l .....

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/s 40A(2)(b) paid to Anand Automotive Systems Limited of ₹ 34,78,043 as excessive and unreasonable. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of AO of disallowing share of common marketing expenses of ₹ 1,44,70,000 u/s 40(a)(ia). Additional grounds: 1. Without prejudice to 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 cance .....

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peal 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 .....

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semi-finished castings (automobile parts). Assessee entered into forward contracts in order to hedge the risk on adverse currency fluctuation in respect of export realisation to the tune of USD.6,00,000. Export receivable of USD 1,73,670 was hedged and the balance forward contracts of USD 4,26,330 were marked to market. The assessee incurred loss of INR 18,22,633 on mark to market. The Assessing officer held that that the Mark to market lossess are purly notional losses. The assessee has not act .....

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has contended that loss in mark to market contracts was not a notional loss but was an ascertained loss. That the assesseehas been taking forward contracts year on year to cover the adverse currency fluctuation risk on export realization and has been consistently accounting open forward contracts on mark to market at the year end and that there was no change in the facts during the year under consideration. The department has been accepting such accounting of mark to market open forward contract .....

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e 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 o .....

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s to the FCs cancelled or terminated on or after the due date. In other words, the FCs booked as integral part of the export invoices lived its booking period in full and they were either terminated by the Bank on or after due date of maturity date of the contract as the actual realization were not received in time. These are not premature cancellations by the assessee and therefore, in our considered view, the said loss of ₹ 4,14,88,805/-, being related to the FCs which are integral or in .....

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ch of the Tribunal, Mumbai Bench, in DCIT v/s Bank of Bahrain (supra) wherein the Tribunal, while holding that Mark to Market losses in respect of forward foreign exchange contract debited to Profit & Loss account is an allowable deduction on the following reasoning:- "i) A binding obligation accrued against the Appellant the minutes it entered into forward foreign exchange contracts. ii) A consistent method of accounting followed by the Appellant cannot be disregarded. The Appellant ha .....

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ounting period. v) In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd., the Appellant's claim is allowable. vi) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit." 6. Thus, in view of the above, we uphold the findings of the learned Commissioner (Appeals) for allowing loss incurred by the assessee on re-statement of pending forward contract agreement at the year end as allowable business .....

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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 t .....

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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. 8. It may be further observed that foreign exchange forward contracts entered into for the purpose of hedging the loss in import- export transactions, have been duly recognized and allowed by the Reserve Bank of India. Vide Foreig .....

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whatever name called, whose value is derived from price movement in one or more underlying assets, and includes, (a) a transaction which involves at least one foreign currency other than currency of Nepal or Bhutan, or (b) a transaction which involves at least one interest rate applicable to a foreign currency not being a currency of Nepal or Bhutan , or (c) a forward contract, but does not include foreign exchange transaction for Cash or Tom or Spot deliveries; Further such contracts have been .....

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ve contract permissible for a person resident in India A. Forward Contract 1. A person resident 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 evid .....

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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 shall not be cancelled. They may be ,however, be rolled-over, h) contracts involving rupee as one of the currencies, once cancelled shall not be re-booked although they can be rolled over at ongoing rates on or before maturity. T .....

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d foreign exchange contracts that the banks have been permitted to enter into such contracts after thorough verification of documentary evidences etc. about the genuineness of the underlying foreign currency exposure and the need of hedging of the loss. Further the maturity of the hedge should not exceed the maturity of the underlying transaction. 10. In view of the above discussions, it can be safely held that in case of import/export business, where the transactions are demonetarized in the fo .....

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to be set off against the profits and gains of business and profession. 11. It is held accordingly that the foreign exchange loss incurred by the assessee on account of entering into forward contracts with the banks for the purpose of hedging the loss in connection with his import/export business cannot be held to be a speculative loss rather a business loss which can be set off against profit and gains of business subject to the condition that the assessee will have to satisfactorily prove tha .....

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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 purp .....

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son, Corporate Relations and Communication and Support. However, the assessee failed to quantify the services rendered by the said M/s. Anand Automotive Systems Limited. In the absence of any such quantification of services actually rendered by the said sister concern, the AO disallowed 20% of the expenditure paid to M/s. Anand Automotive Systems Limited. In appeal, the Ld. CIT(A) also confirmed the addition made by the AO on this account. 14. Before us, the Ld. AR has submitted that the assesse .....

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or by procuring the necessary professional inputs from third parties. AASL is, therefore, a service company, the services rendered by which are for the benefit of companies belonging to the Anand Group. Professional fees paid to AASL was wholly and exclusively for the purpose of assessee s business. Assessee has been paying professional fees and rent to Anand Automotive Systems Ltd. for last 10-12 years and no such disallowance has been made in the past. It has been further conteded that as the .....

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he AO by the ITAT vide order dated31.01.2013 in ITA No. 7165/M/2012 and in the set aside proceedings, the AO also deleted the said addition vide order dated 19.02.2014. The Ld. DR, on the other hand has relied upon the findings of 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 .....

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vour 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 (VGIL). These payments were made in terms of the contract between the appellant .....

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id M/s. Victor Gaskets India Limited. The AO was of the view that the provisions of section 194C of the Act were clearly attracted and since the tax at source was not deduted by the assessee, he, therefore, disallowed the said amount of ₹ 1,44,78,000/- under section 40(a)(ia) of the Act. Without prejudice, he disallowed 20% of the same, as excessive and unreasonable. However, since the entire expenditure was disallowed under section 40(a)(ia) of the Act, hence, no separate disallowance of .....

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e total expenses. It has been further contended that although the assessee s representative admitted before the CIT(A) that the assessee should have deducted tax at source of such payment, however it is a fact that payments made to Victor Gaskets was actual reimbursement of expenses without any mark-up and therefore, the such reimbursement was not in the nature of income. Therefore, no tax was required to be deducted on such reimbursement of expenses. Without prejudice to the above, it has been .....

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ad 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 ag .....

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ces as detailed above to the assessee and besides that it had been engaged in promotion of its own products also. 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 .....

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in the agreement prove beyond doubt that the VGIL has been providing the services to the assessee as an independent contractor. Hence, the assessee was liable to deduct tax at source as per the provisions of chapter XVII-B of the Act and therefore disallowance was attracted in this case under section 40(a)(ia) of the Act. 19. The next contention of the ld. counsel for the assessee has been that a new proviso has been inserted in section 40(a)(ia) vide Finance Act, 2012 w.e.f. 01.04.13 wherein it .....

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enience are reproduced as under: Amounts not deductible: 40. Notwithstanding anything to the contrary in sections 30 to 64, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a)…................ (ia) any interest, commission or brokerage, 67[rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contra .....

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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 de .....

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to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: 21[Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the .....

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t in such form as may be prescribed]........................... - 21. Inserted by the Finance Act, 2012, w.e.f. 1-7-2012 - 20. The Ld. counsel for the assessee has relied upon various case laws to press the point that the newly inserted proviso to section 40(a)(ia) is in fact clarificatory in nature and should be applied/retrospectively. 20.1 On the other hand, the ld. D.R. has contended that it has been specifically provided in the Act that the said proviso comes into operation w.e.f. 01.04.13 .....

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ed 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 t .....

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elow. In our considered opinion, since the payees / recipients i.e. G. Ramesh and Ramesh Kotian have already shown these amounts in their respective books of account audited under section 44AB of the Act; declared and offered the same to tax in their returns of income for the relevant period, thus by virtue of the amendment to the provisions of section 40(a)(ia) of the Act by insertion of the second proviso to section 40(a)(ia) of the Act w.e.f. ;1.4.2013, the provisions of section 40(a)(ia) of .....

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provisions of section 40(a)(ia) of the Act is not attracted to the payments made by the assessee to Sri G.Shankar of ₹ 2,69,21,500 and to Sri Ramesh Kotian of ₹ 1,54,75,000 since the object of introduction of section 40(a)(ia) of the Act is achieved for the reason that the payees / recipients have declared and offered to tax the payments received from the assessee in their respective hands. 3.4.2 As regards the issue of non-furnishing of Form No.26A, we are of the view that since th .....

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