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2015 (12) TMI 1275 - ITAT DELHI

2015 (12) TMI 1275 - ITAT DELHI - TMI - Transfer pricing adjustment - selection of comparables - Held that:- We are inclined to accept the contention of the ld. CIT DR because there is no straitjacket formula given in either section 92A(2)(b) or in Rule 92A(2)(b) or in Rule 10B of the Rules for applying filter to the related party transactions, however, it is a well-settled proposition that if any company is functionally comparable with the taxpayer but at the same time it is more than a specifi .....

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oying settlement of all employees from the holding company NTPCS at cost and the benefits received from the holding company and related party transactions (RPT) are not monetised in the annual report and in absence of specific data in this regard, NTPCES cannot be held as comparable with the assessee company. Therefore, AO/TPO was not justified in including NTPCES in the final set of comparables for benchmarking impugned international transaction of the assessee company and they are directed to .....

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demonstrate that CIEL should not have been included in the final set of comparables for making transfer pricing adjustment pertaining to the impugned international transactions of the assessee company and we order to exclude the same from the final set of comparables.

Mark to market losses on foreign exchange forward contracts disallowed - Held that:- Undisputedly, the facts and circumstances of the present case are more or less similar to the present AY 2009-10 and the assessee book .....

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oice both in terms of the amount as well as the tenure. DRP has drawn the table in this appeal and thereafter noted that out of 9 forward contracts, the assessee has only used 4 forward contract fully and the assessee has not used these forward contracts immediately but started using them against the sale invoice after the lapse of time of few months. Ld. DRP further noticed that contract no. 1461 was used for the first time on 31.10.08 for a nominal sum of USD 632 and thereafter in November for .....

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upreme Court in the case of Woodward Governer (2009 (4) TMI 4 - SUPREME COURT) while the assessee is following mercantile system of accounting, the loss suffered by the assessee by fluctuation in the foreign exchange as on the date of balance sheet is an item of expenditure u/s 37(1) of the Act. Under this proposition and dicta of Hon’ble apex court, and facts emerging from the DRP order, we find it appropriate that the issue requires detailed examination and verification and calculation on scie .....

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2/Del/2014 - Dated:- 14-10-2015 - SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER For The Appellant : Shri S.D. Kalipa, R.R.Maurya, Praveen Sharma, Sanjay Kumar, Advocates For The Respondent : Shri Ravi Jain, CIT DR, Subhakant Sahoo, Sr. DR PER CHANDRAMOHAN GARG, J.M. This appeal by the assessee has been preferred against the order of DCIT, Circle 2(1), New Delhi dated 6.1.2014 passed u/s 143(3) r/w section 144C of the Income Tax Act, 1961 (for short the Act) i .....

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Panel ("DRP") erred in making an addition of ₹ 57,46,70,024/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions under section 92 of the Act. Thus, in passing the order, the Ld. AO/Ld. TPO/Ld. DRP erred in: 3.1 Rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning. 3. .....

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orking capital profile and thus not following the binding directions of Hon'ble DRP. 3.7 Denied the benefit of economic adjustments on account of difference in risk profile in arriving at the arm's length mean margin. 3.8 Considered reimbursements as part of the operating cost and recomputed the profit margin of the Appellant. Further, the Ld. TPO did not follow a consistent approach by not considering reimbursement received as part of operating revenue on the same principle. Further, th .....

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contract as on balance sheet date are notional and contingent in nature. 5.2 That the Ld. AO erred in placing reliance on Instruction No. 3/2010 dated 23 March 2010 issued by the Central Board of Direct Taxes, as this instruction is issued with respect to assessees trading in forex-derivatives. Also, the instruction is issued after the year under consideration. Thus, accordingly the same is not applicable to the assessee. Further, the said this Instruction is ultra vires to the scope of section .....

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llate Tribunal in the Appellant's own case for the assessment year 2008-09 reported as Bechtel India (P.) Ltd. vs. ACIT [2013] 33 taxmann.com 213 wherein the mark to market losses in respect of foreign exchange forward contracts as on the balance sheet date was allowed to the Appellant. 6. That the Ld. AO has erred in charging interest under section 234B, 2340 and 244A of the Act amounting to INR 13,40,39,006. 7. That on the facts and in the circumstances of the case and in law, the Ld. AO h .....

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ended that the TPO was not justified in rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning. Ld. Counsel further contended that the TPO was not correct in ignoring the comparable set proposed by Appellant as a result of fresh benchmarking study without assigning any reasoning and accepting companies which were functionally not comparable to the Ap .....

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by recomputing the ALP of the alleged international transaction u/s 92 of the Act. 5. Ld. Counsel further elaborated the background and factum of the case and submitted that the assessee company is a captive service provider, providing engineering design and related services to its Associated Enterprises (AEs) to support the overseas office s turnkey project execution. Referring to Paper Book pages 382-481, ld. Counsel submitted that as per brief overview of the academic analysis conducted in t .....

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rking capital, risk and ideal capacity. Ld. Counsel further pointed out that after ld. DRP ruling, the margin after providing working capital adjustment was 15.34% wherein risk and ideal capacity adjustment was not provided by DRP/TPO for making impugned addition. 6. Ld. Counsel of the assessee reiterating its written submissions dated 17.6.2015 spread over 7 pages submitted that in the Transfer Pricing study, the assessee selected 7 comparables while the TPO accepted that the assessee is in the .....

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lter mechanically by taking into account monetary transaction between the holding company and CEIL by ignoring various non-monetary benefits like free or level-basis of office facilities and secondments of employees by the holding company. Ld. Counsel contended that in the case of NTPCES, ld. DRP failed to note that this company does not even discuss RPT in its relevant annual report and it is pertinent to note that Schedule 9 of annual report clearly states that the amount payable to NTPC under .....

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employ high-end technological and engineering resources and personnel. Ld. Counsel vehemently contended that the DRP erred in analyzing the function of these entities in terms of resources employed and failed to consider the wide variation in skills and qualification of employees. In the light of broad functional profile of these companies which cannot be held as comparable for benchmarking international transaction of the present assessee company for the year under consideration, ld. Counsel po .....

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uced below for the sake of clarity and transparency in our findings:- Sr. No. Bechtel India NTPCES Pg. 810/Vol.IV CEIL Pg. 765/Vol.-IV 1. Operating Revenue ₹ 178.36 Cr. Rs.71.72 Cr. ₹ 24.75 Cr. 2. Status Private company- incorporated in 1994 as 100% subsidiary of Bechtel Corporation, USA. Government company 100% subsidiary of National Thermal Power Corporation (NTPC), which is a Government company. Government Company. Till 1994, it was a division of Engineers India Ltd. (EIL), ( a go .....

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ndated to take up consultancy and other assignments in the area of Electrical Distribution Management System. (Copy of screenshot at Annexure 1A) As per Schedule 17 of AR (pg. 843 of Vol.-IV/AR) The company is operating in a single segment, that is, providing consultancy, project management and supervision services." Extracts from AR: It executes turnkey contracts for XIth Plan electricity supply projects entrusted/awarded to it by government companies and Departments. Has JV for retain dis .....

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DRP order). The contracts/projects 'entrusted' (Pg. 811/Vol.-IV). (Ref. Pg. 810-812, 835-838, 843/Vol.-IV.) Third Party Inspection (TPI), & Certification of equipment supplied by vendors and fabrication or installation work of Contractors of ONGC under a MOU between EIL & ONGC dt. 11/4/1985 on nomination basis. (Ref. Pg. 765-773, 803-805/Vol.-IV). Terms of MOU are not known. Also carries on similar TPI & Certification work independently for other PSUs. 4. Geographical Market .....

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(Pg. 835/IV.) (ii) Schd. 17, Notes on Accounts: "(5) All the employees of the company are on secondment from the Holding Company, "(9) The common services being utilized by the Company for it's office at NOIDA are provided without any charges by the Holding Company. "(Pg. 844/Vol-IV) All employees on secondment from NTPC at cost. Benefits received from Holding company not monetised in the A.R. Revenues are from Government companies/Departments, which must be considered as rela .....

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"(5) The jobs awarded by ONGC on nomination basis are being governed by the MOU signed between EIL & ONGC dated 11/4/1985. (6) The company has a Memorandum of Understanding with Engineers India Ltd. (The Holding Company) for providing manpower services, office space and facilities etc. The MOU provides level basesd fixed man hour/man-day rates for EIL employees, inclusive of overheads and fixed annual cost towards space, infrastructure and facilities etc. provided by EIL. The company al .....

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aforesaid contention of the assessee, both these companies are not a suitable comparable for benchmarking international transaction of the assessee Bechtel India Pvt. Ltd., therefore, the AO/TPO may be directed to delete the same from the final set of comparables. Ld. Counsel also pointed out that after deletion of these impugned comparables, the international transaction of the assessee company would fall within 5% + - limit and there would be no requirement of making any transfer pricing adjus .....

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ngineering design, project support including design as per specification of foreign AE and impugned two companies NTPCES and CEIL are also rendering services in the similar field, therefore their suitability and comparability cannot be challenged on the frivolous and petty grounds. Adjudication of comparability of NTPCES with the assessee company 10. On careful consideration of above submissions of both the sides, we find it appropriate to consider the issue of comparability of NTPCES and CEIL o .....

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fications of the foreign AEs i.e. Bechtel Corporation USA. Ld. Counsel further pointed out that the assessee company is securing operating revenue of ₹ 178.36 crore from its 100% export of services to its AE having forex fluctuation risk and 100% related party transactions (RPT) and DRP has failed to consider these important factual aspects while rejecting the objections of the assessee company to the comparability of NTPCES. 11. Ld. Counsel further pointed out that NTPCES is a 100% govern .....

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e company is also operating in a single segment of providing consultancy, project management and supervision services. 12. Ld. Counsel further pointed out that NTPCES executed turnkey contracts for XIth Plan electricity supply projects entrusted/awarded to it by government companies and departments under joint venture for retaining distribution of power in Kerala. Ld. counsel further pointed out that this company was also entrusted the work of rural electrification of 4107 villages under Rajiv G .....

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export services and the same cannot be held as comparable with the assessee company having 100% export of services outside India to its AE only. 13. Ld. Counsel also pointed out that the assessee company is having 100% RPT with its AE whereas RPT of NTPCES has not been reported in the annual report and this company has undertaken transaction mainly with the related parties such as government companies and government departments. Ld. Counsel also pointed out that as per annual report of the NTPC .....

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ot monetised in the annual report. Placing reliance on the judgment of ITAT in the case of Thyseen Krupps India (Pvt.) Ltd. vs ACIT (2013) 33 Taxman.com 107 (Mumbai Tribunal). Ld. Counsel submitted that when a comparable has two segments and its revenue from comparable segment is complete in itself and is not influenced by inter-segment revenue, comparability in such a case has to be examined at segmental level and not entity level. Ld. counsel also pointed out para 12.8.1 and 12.8.2 of the orde .....

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es their result unreliable. Ld. counsel also pointed out that companies whose revenue from engineering support services is less than 75% of the total operative revenue should be excluded. The ld. Counsel also pointed out that the ld. DRP in its order dated 16.12.2014 for AY 2005-06 has concluded that NTPCES is not functionally comparable with the assessee Bechtel India. He took us through operative para at pages 5-6 of the DRP order (supra). 15. Replying to the above, ld. DR pointed out that bus .....

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ut that as per annual report of the NTPCES the assessee company also has similar functional profile, therefore, the DRP was right in upholding the conclusion of the TPO in this regard wherein NTPCES was included in the final set of comparables. 16. On careful consideration of above submissions of both the sides, we note that the business and functional profile of assessee company as tax payer, as noted by the DRP reads as under:- Business Profile of Bechtel India as per taxpayer: • Bechtel .....

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9;s length Price ('ALP') by the taxpayer recognizes that BIPL performs contract engineering design services for its group companies. BIPL leverages on all the valuable intellectual Property ( IP') Right ('IPRs') [know-how, copyrights, etc] and other commercial processes, methodologies, etc. belonging to its AEs. Further, the Group is involved in complex operations of marketing, bidding for projects, providing turnkey solutions, project management and adhering to delivery time .....

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f the assessee company, the assessee company is rendering support services of engineering design and drawing, execution of engineering designs and drawing for various overseas group entities to support the overseas offices in turnkey project execution. The assessee company also undertakes engineering design and relates services for its overseas group companies. From the aforesaid business and functional profile it is amply clear that the assessee company performs contract engineering design serv .....

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to its overseas AEs and the assessee has less complex operations, bears lesser share of risk. Ld. DR has not disputed and could not demolish this fact that as per website of NTPC.com the NTPCES is a wholly owned subsidiary company of NTPC with the objective of making a foray into the business distribution and supply of electrical power as a sequel to reform initiated in the power sector. We further note that undisputedly NTPCES was also mandated to take up consultancy and other assignments in t .....

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awarded to it by the Government companies and electrical departments which also includes activity of distribution of power in Kerala. Undisputedly, the NTPCES was also provided work contract of rural electrification of 4107 villages, execution of turnkey projects and also provided third party inspection services. While the NTPCES is also rendering services for retail distribution of power and management consultancy to DISCOMs and other power generating companies, then its functionality with the .....

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s the NTPCES has nil exports having 100% domestic customers who are government companies and departments. We cannot also ignore this fact that the assessee Bechtell has 100% related party transaction with its AE and RPT have not been reported in the annual report of the NTPCES. It cannot be ignored that the contracts purchased for rural electrification schemes essential to NTPCES under Rajiv Gandhi Grameen Vidutikarana Yojana (RGGVY) were not awarded under open tender as per CVC Circular dated 3 .....

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ited, which was included by the TPO at his own. The learned Counsel for the assessee contended that this case should be ignored because it is a Government Undertaking. It was further pointed out that most of its customers of the 'Turnkey project division' are related parties, being, other Public Sector Undertakings, which is much more than the filter of 25%. The learned Departmental Representative, however, accentuated that the TPO was right in including this case in the list of comparab .....

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ave been included in the list of final comparables for two reasons. First reason is that profit motive is not a relevant consideration in case of Government undertakings. Many Government Undertakings even operate on losses in furtherance of the social obligations of the government. The second reason is that Engineers India Limited earned income from turnkey project by successfully completing the project of IOCL and other Public Sector Undertakings. In that sense of the matter, the related party .....

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sed by the Tribunal. In the present case, the NTPCES was sheltered by its holding company NTPCES and government companies and departments awarded/entrusted various projects/contracts for rural electrification, distribution of power and project management consultancy, therefore, NTPCES loses the tag of comparability with the assessee Bechtell India. We also find it appropriate to mention that it cannot be ignored that the NTPCES is also enjoying settlement of all employees from the holding compan .....

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mparability of CIEL with the assessee company 18. Ld. counsel of the assessee company reiterated the functionality of the assessee company Bechtell India submitted that the CIEL is not functionally similar to the assessee company due to its special features and monopoly based contract awarding privileges granted by ONGC and other government companies. Ld. Counsel strongly contended that the CIEL is a government company and it was a division of Engineers India Ltd. till 1994 from which it was dem .....

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ly inferred that the CIEL is enjoying the benefits of awarding of contact work on nomination basis without any open tender from its holding company EIL and other government companies. Ld. Counsel also pointed out that the CIEL also carries on similar Third party inspection (TPI) and certification work independently for other public sector undertaking and it cannot be compared with assessee Bechtell India who is rendering only engineering support services including related drawing and design, as .....

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racts of ONGC which is a service rendered after commissioning and installation of project. 19. Ld. Counsel also pointed out that CIEL provides aforesaid services to its domestic government companies and PSU having insignificant export of services whereas the assessee Bechtell India is exporter of 100% services to its AE. Ld. Counsel also pointed out that the assessee Bechtell India receives its remuneration/revenues from its AE in foreign exchange having forex fluctuation risk whereas the CIEL h .....

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g governed by the MOU or by holding company dated 11.4.1985. 20. Ld. Counsel also pointed out that contracts being awarded to CIEL for rural electrification schemes sanctioned to NTPCES are not awarded under open tender as per CVC Circular dated 3.3.2007 and hence, this company having privilege of awarding contracts and job on nomination basis without any open tender cannot be held as functionally comparable with the assessee company. 21. Replying to the above, ld. CIT DR submitted that apart fr .....

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IT DR contended that in this situation of open market environment, MOU between EIL and ONGC referred to in the annual report of CIEL for FY 2008-09 pertaining to AY 2009-10 has no relevance. 22. Ld. CIT DR also submitted that the TPO rightly observed that since a person holding voting shares of 26% in a company is considered to be its AE u/s 92A(2)(b), therefore, RPT filter of 25% of total revenue is justified, therefore, RPT filter of 25% without recognizing non-monetized benefits flowing from .....

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trolled enterprises as no such requirement is prescribed in AS-18. Ld. DR finally submitted the action of the AO/TPO by inclusion of CIEEL in the final set of comparables for benchmarking of impugned international transactions of the assessee company. 23. Ld. Counsel of the assessee also placed rejoinder to the aforesaid submissions and contentions of the ld. CIT DR and submitted that the ld. DRP has duly noted the business functions of the assessee and have reproduced the same at page 2 of its .....

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e purpose of selecting comparables viz. (i) companies having revenue of less than ₹ 5 crore from rendering support services and; (ii) revenue from engineering support services is less than 75% of total operating revenue. Ld. Counsel also canvassed another submission that the ld. TPO/DRP have applied aforesaid two filters for selecting comparables because they accept that the primary business of the assessee company is of procuring design and drawings for AE enabling them to execute enginee .....

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page 48 of the assesse s paper book wherein sole criterion adopted by the DRP for treating NTPCES and CIEL s comparable to the assessee is that like Bechtel India, these two companies employ high-end technology and handling sources and personnel. 24. Ld. Counsel finally pointed out that CIEL is not functionally comparable with the assessee Bechtel India not only due to aforesaid reasons but related party transaction declared by CIEL withholding company are only 19.60% and transaction with other .....

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very outset, let us deal with the issue of related party transactions (RPT). Ld. DR relying on the TPO s observations submitted that since the person holding voting shares of 26% in a company is considered to be its AE u/s 92A(2)(b) of the Act, thereafter RPT filter of >25% of total revenue is justified. Ld. DR further pointed out that RPT filter of 25% without recognising nonmonetized benefits flowing from the holding company CIEL/NTPCES has been correctly applied. Ld. DR has also contended .....

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no. 15 and 16 of this order and submitted that after considering the ratio of all relevant judgments and orders, the ITAT Delhi categorically held that the percentage of RPT to make a company as ineligible for comparison should be taken as more than 25% and not 15% as suggested on behalf of the assessee. 26. On the issue of RPT, it has been contended by the ld. Counsel of the assessee that 25% filter is not an appropriate filter for RPT and this test cannot be applied mechanically as if it has .....

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al revenue. On careful consideration of above submissions, we are of the view that the ITAT Delhi in the case of Nokia India (P) Ltd. (supra) held that in principle if any company though functionally comparable but is more than specific percentage of RTP, then the same should be ignored by treating as a controlled transaction. The Tribunal in this order further held that the percentage of RPT to make the company as ineligible for comparison should be taken as more than 25% and it was held that a .....

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n to consider the judgment of BMW India Pvt. Ltd. vs. Addl. CIT (I.T.A .No.-5354/DeIl2012) while deciding the issue relating to advertising, marketing and promotion ("AMP") on behalf of the Appellant. This is with respect to Motorola Solutions India Private Limited ("MSILP") appeal no. ITA 56371 Dell 2011 for Assessment Year ("AY") 2007-08. The hearings for the same were concluded on July 18, 2013 and the order was reserved on that date. The matter is now awaiting p .....

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tor vehicles and parts. During the year under consideration in the order, under the Transactional Net Margin method ("TNMM") applied by BMW India its operating profit margin was higher than the operating profit margin of the comparable companies. During the transfer pricing assessment proceedings, the Ld. Transfer pricing Officer ("TPO"), had alleged that BMW India had incurred excessive AMP expenses vis a vis the comparable companies and therefore, should have been reimburse .....

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is distinguishable from the decision of the Special Bench in L.G. Electronics case ("Special Bench") as the fact under consideration in BMW India is the remuneration model of a distributor and not that of a licensed manufacturer. The relevant text of the decision has been provided hereunder: (Para 6.20, page 50 of BMW India order): Quote On examination of contemporary Guidelines/jurisprudence on the subject, we are of the view that a distributor is rewarded by the entity for whom the d .....

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second point pronounced by the Hon'ble Tribunal was that during the year under consideration in the order, BMW India's operating profit margin was higher than that of the comparables. The comparable companies set and their margins were not disputed by the Ld. TPO and the Hon'ble DRP. Hence, the Hon'ble Tribunal held that the compensation for AMP services was embedded in the pricing arrangement of the contract goods itself and that no further compensation was required to be made b .....

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rrangement of the contract goods itself It is seen that the comparables identified by the assessee and accepted by the TPO as having similar intensity functions have earned profit at the gross and net levels far below the profits both at gross and net levels as achieved by the assessee. In the circumstances as evidenced from record, we are inclined to agree with the submissions advanced on behalf of the assessee that no further compensation was required to be made by the AE as the same has alrea .....

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ge 56 of BMW India order): Quote The claim of the assessee has merit as the assessee with the AE can agree to be rewarded/ remunerated by price adjustments to earn profits which include the cost of rendering services with profit. The department cannot insist in the absence of any provision under the Act that the mode of compensation to the assessee by the foreign AE necessarily has to be directed compensation and pricing adjustment is not accepted. Unquote The Hon'ble Tribunal further held t .....

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was no occasion for the AE to further compensate the assessee for the services rendered towards building the brand of the AE as the same already stood factored in the pricing adjustment of the contract goods. As such the occasion to consider the applicability of mark-up does not arise. Unquote The Hon'ble Tribunal, in para no. 6.27 of the BMW India order has also mentioned that the Special Bench has accepted that there are diverse nature of facts, business models and peculiar terms and condi .....

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f page 1 of the written submission filed with Your Honours on May 20, 2013 and again on para 5 of page 133 of the written submission filed with Your Honours on May 20,2013. The Ld. TPO did not have any dispute relating to the TNMM analysis conducted by the Appellant. The only dispute was on the matter of AMP expenses. The Ld. TPO based on the bright line analysis held that MSIPL should have been reimbursed by the AE for the excess AMP expenses incurred by it along with a mark-up. The Appellant f .....

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n the BMW India order. Hence, we humbly submit that the decision rendered in the BMW case has a direct bearing on the AMP issue. This has been summarized as under: 1.BMW India is a distributor of motor vehicles and related parts. MSIPL is also a distributor. Hence, what is relevant for consideration is the remuneration model of a distributor in both the cases. 2.BMW India's operating margin was higher than that of the comparables. Similarly, MSIPL also operated at a higher net operating marg .....

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on'ble Tribunal has held that the department cannot insist that pricing adjustment cannot be accepted as mode of compensation. Herein, it may be reiterated, that MSIPL has already received the said pricing adjustment through credit notes as a cost credit! purchase price adjustment from its AEs. This has been mentioned in para no 18 of page 11 of the written submission filed with Your Honours on May 20, 2013 and in para 8(1) of page 134 of the written submission filed with Your Honours on May .....

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n rendered in regard to AMP Expenses and for quantification of AMP Expenses also detailed guidelines have been laid down in the case of LG. 15.2 In case of LG Electronics brief facts were as under: "The factual matrix of the case is that L.G. Electronics Inc. (hereinafter called as - LGK), is a Korean based company, engaged in the business of manufacture, sale and distribution of electronic products and electrical appliances such as television, audio/video equipments, washing machines, refr .....

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Technical assistance and royalty agreement was entered into between these two entities on 1-7- 2001 by which LGI, in the capacity of a licensee, obtained a right to use the technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of the agreed products from the LGK i.e. the licensor." 16. In assessee's case the factual matrix has been reproduced earlier. Assessee is primarily engaged in the distribution of telecom equipmen .....

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rent company of the group is BMW AG i.e. the associated enterprise (hereinafter referred to as the "AE") which is headquartered in Munich, Germany and is primarily engaged in the manufacturing of automobiles and motorcycles. The major car brands manufactured by BMW AG are stated to be BMW, Mini and Rolls-Royce. The TPO takes note of the fact that the assessee had undertaken the following international transactions: 1. Purchase of raw material 167,051,934 TNMM 2. Purchase of traded vehi .....

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at the assessee described its activities as that of a distributor. The TPO referred to the Importation Agreement between the parent company BMW AG and the assessee and observed that the same had been entered into w.e.f. 01.01.2006 and it stated that the assessee had the following duties in regard to marketing and promotion of the products of the parent company: "2.2. Responsibility in the Contract Territory BMW India represents the interest of BMW AG in the Contract Territory. It is respons .....

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etwork; • Performance of an adequate advertisement and sales promotion as well as public and media relations. • Collection, evaluation and communication of market information to BMW AG. 3. Scope of the Activity of BMW India 3.1 BMW India will meet its responsibility for the promotion of sales and the full utilization of the market potential for the Contract Goods by applying its best efforts and adequate resources toward effective sales promotion and advertising for the Contract Goods .....

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the same should be ignored by treating it as a controlled transaction and hence, the view taken by the ITAT Delhi in the case of Nokia India Pvt. Ltd. (supra) is a balanced view supported by various orders of the Tribunal on the issue. Therefore, we are inclined to accept the contention of the ld. CIT DR that a company should be considered as non-comparable only if its RPT exceeds 25%. 28. The next issue for our consideration is the functional comparability of the assessee Bechtel India with CI .....

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ncy for offshore Oil & Gas Process & Well platforms, Petro-chemical Refineries, Submarine and Cross country Pipelines etc. CEIL provides services designed to suit project requirements throughout the life span of a plant / facility from concept to commissioning, revamping and health check. It promotes Safety, Quality and Reliability throughout the design and operating life of all types of equipment, structures, pressure vessels, pipelines and rotating machinery. The services cover all typ .....

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ion for cross country water / gas pipelines PMC Services for Infra structure projects of Municipalities HAZOP Studies / Quantitative Risk Analysis Mitigation Measures Report with recommendations to reduce the risk factor is issued after studying the above. 5.7 Energy Efficiency Audit In addition to Certification Services, CEIL also carries out Energy Audit, Base Line Verification of energy intensive facilities e.g. pumping stations, municipal lighting, and commercial buildings as per client' .....

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codes backed by over 4 million man hours of experience. It has on its roll Engineers qualified by various recognized NDT bodies like ASNT, ISNT and QMS. CEIL's expertise covers Design Verification, Quality Services and Commissioning Assistance on: High pressure Reactors, Pressure Vessels, Columns, Heat Exchangers, Reformers of carbon steel, stainless steel, alloy steels & non ferrous materials Clad Columns, Storage Tanks, Horton Spheres, Mounded Tanks Equipment for Combustible / Explosi .....

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hich is engaged in the functions of third party inspections (TPI), certification of equipment supplied by vendors & installation of work of contractors of ONGC and other government departments and private sector undertakings. The CIEL having domestic consumers, government companies and public sector undertaking having insignificant export surplus cannot be compared with the assessee Bechtel India which is 100% exporter of services to its AE Bechtel Corporation, USA. 30. We may point out that .....

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rty inspection of equipments provided by a contractor and obviously certification and TPI functions are dissimilar form the business of rendering engineering support services including related design and drawing as per specifications of foreign AE and by using intangibles/IPR of parent company. 31. Ld. DR could not demolish this factum that the certification/TPI involves testing/assessing and auditing of the work done by the high-end technocrats which conforms to specifications prescribed in the .....

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design and drawings given by its parent Bechtel Corporation USA. In this modus operandi this work is outsourced by the nonresident AE to the assessee Bechtel India which carry out the work as per specifications given by the outsourcing company AE. We may also point out that the revenue of CIEL form export of surplus is 3% which is insignificant and the income from export of services by the asessee Bechtel India is 100% of operating income as there is no domestic client, thus, as per Rule 10B(2) .....

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change fluctuation risk of the assessee company coupled with below 25% RPT undertaken by the CIEL, we, therefore, decline to agree with the conclusion of the AO/DRP/TPO that the CIEL is a suitable comparable for the purpose of proposed TP adjustment made by the authorities below. Functional dissimilarity and other aspects cannot be ignored and these factors clearly demonstrate that CIEL should not have been included in the final set of comparables for making transfer pricing adjustment pertainin .....

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Ld. Counsel of the assessee further pointed out that the AO erred in holding that the Mark to Market losses in respect of re-measuring the foreign exchange forward contract as on balance sheet date are notional and contingent in nature which are not allowable. Ld. Counsel vehemently pointed out that the AO further erred in placing reliance on Instruction No. 3/2010 dated 23rd March 2010 issued with respect of assessees trading in forex derivatives and these instructions were issued after comple .....

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posure. Ld. counsel has further drawn our attention towards order of ITAT in assessee s own case for AY 2008-09 reported as Bechtel India Pvt. India Ltd vs ACIT(2013) 33 Taxman.com 213 (Delhi Tribunal) and submitted that the mark to market losses in respect of foreign exchange forward contracts as on the balance sheet date was allowed to the assessee. Ld. counsel of the assessee also took us through the written submissions dated 13.6.15 filed on 17.6.15 which read as under:- Schedule XIII - A. S .....

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foreign exchange contracts The company enters into forward foreign exchange contracts with the bankers to mitigate the risks associated with foreign exchange fluctuations associated with the accounts receivable and forecasted sales transactions. Any premium or discount arising at the inception of the forward exchange contract, which have been taken on underlying transaction, is recognized as expenses/income over the life of the contract and exchange differences arising on such forward exchange c .....

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. In Cr.) (rounded) a. All 9 foreign exchange forward contracts (F.C) were entered With authorized bank on 6.8.2008 maturing every successive Month starting from 3.4.2009 to 4.12.2009 119.50 b. Export sales booked during Financial Year 2008-09 Financial year 2007-08 178.36 159.23 c. Receivables as on 31.3.2009 Receivables as on 31.3.2009 71.64 41.61 d. Foreign exchange (USD) actually received in Financial Year 2008-09 Financial year 2007-08 156.72 167.31 e. Value of Unexpired FCs as on 31.3.2009 .....

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s accounting policy followed by assesee for Pg. 462-476 & 450- foreign exchange (forward) transactions. 51/P.B.Vol.-II, AS 11 & AS 30 read with AS 1. ii) The DRP ignores the judgment of Hon'b1e Delhi High Court in Virtual Soft Systems Ltd. (341 ITR 593) brought to its notice. It has been held therein that:- "10 .... the fact that the opinion of the Institute of Chartered Accountants of India was expressed in a Guidance Note which had not attained a mandatory status, would not pr .....

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keeping in view the principles of natural justice . It is significant to note the DRP's order dt. 26.11.2013 is appealable u/s 253(1)(d) of the Act and was not binding on the Department. iv) Holds Supreme Court decision in Woodward Governor is not applicable. Pg. 382/P.B.Vol.-II v) Follows CBDT Instruction no. 3/2010. vi) DRP selectively quotes guidelines issued by RBI. It ignores the Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000 readwith Schedule 1 of .....

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ara 3.7.1 at Pg. 36 of DRP order at Pg. 65 of P13 Vol.-I). 5. The Ld. DRP alleges that the FCs were not taken out by the assessee for business purpose. This bald allegation is not substantiated by the DRP. Further, the allegation made by the Ld. DRP is selfcontradictory. In the preceding assessment year, the Ld. AO had disallowed similar Mark to Market accounting of loss on unmatured FCs on the last date of accounting year; i.e., 31.3.2008. However, this loss has been allowed by the AOIDRP in th .....

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fluctuation loss on unexpired FCs booked on 31.3.2008 is covered by the Hon'ble Supreme Court decision in the case of Woodward Governer (312 ITR 254) ii) The assessee follow mercantile system and the loss is booked on a scientific basis in the ordinary course of business. iii) The loss has been incurred for hedging of foreign currency fluctuation involved in export sales; which is a business decision to safeguard its interest. iv) This loss is not notional and it is business loss. It has to .....

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cording to DRP, the assessee should have booked the FCs only after it had raised an invoice and only to the extent of amount as per each and everyone of the hundreds of invoices raised by the assessee under continuous service contracts with the AEs, which normally run for several months overlapping more than one financial year. The sample FCs and corresponding invoices, which run into hundreds, are at Pgs. 737-743 of Vol.-IV. The Ld. DRP has failed to appreciate that it would be not only unpract .....

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of that section. It has thus erred in law in applying proviso (b) and (d) to section 43(5) of the Act. The proviso merely excepts transactions, which are other-wise speculative under main without first ascertaining as to whether the FC transactions are speculative as per section 43(5). 9. The Ld. DRP, after verifying all the Forex Inward Remittance Certificates (FIRC), admits that all Forward Contracts were ultimately settled through the delivery of prescribed quantity of US dollars on the due d .....

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ng the transaction into the fold of main section. There is no dispute that all forward contracts were "ultimately" settled through delivery of the underlying commodity, i.e., U.S. dollars. The Ld. D.R.P. itself has recognised this fact as may be seen from the Tables at Pg. 32 & 37 of ORP order (Pg. 61& 66IVol-f). This being the undisputed factual position, the impugned transactions clearly do not fall within the meaning of the term 'speculative transaction' as defined i .....

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Ltd. Vs. CIT (1975) 100 ITR 715 (SC) at Pg. 759/vol.-IV). Proviso to Sec. 43(5) not applicable:- 11. Since the main section 43(5) of the Act is not applicable to the facts of the case, the Ld. ORP erred in law in invoking. the proviso to that section. The ORP's action of invoking the proviso to Sec. 43(5) is manifestly erroneous. It is settled law that- if a contract is ultimately settled by way of actual delivery (as opposed to constructive delivery) of the underlying commodity, it is not .....

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ment is reached by paying the difference between the contracted price and the price of the commodity on the date of settlement. AO/DRP in A.V. 2010-11:- 13. In the succeeding A.Y. 2010-11, the actual loss incurred was ₹ 15.75 crores and the remaining amount of ₹ 6.05 crores was offered to tax by the assessee in its return for A. Y. 20 10-11, which is accepted by the AO. (Re .Pg. 753 & 754I Vol.-IV). The DRP has also not interfered with the decision of the AO. Thus we have a situa .....

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ssessee is not a member and the assessee company failed to demonstrate that the transaction in question were has in transactions in absence of details of forex forward contracts which were not linked to the trade/export. Ld. CIT DR further pointed out that the assessee is not a member of a forward market or an exchange and it is not the business of the assessee company to undertake foreign exchange forward contracts. Ld. CIT DR further pointed out that forward contracts on certain dates could ha .....

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ds to be examined in details so as to consider the nature of such losses to adjudicate the allowability and in that case the matter was set aside by the Tribunal on this issue as the assessee had not furnished requisite details to the AO. 36. Ld. CIT DR further pointed out that in the case of DCIT vs Bank of Bahrain and Kuwait in ITA No. 4404 & 1883/Mum/2004 the Special Bench of ITAT Mumbai while holding that mark to market losses in respect of forward foreign exchange contracts debited to p .....

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sessee. Ld. CIT DR also pointed out that the special bench order was passed in the case of assessee bank and assessee of the present case is an engineering service provider assessee so the business profile varies substantially. 37. Replying to the above ld. Counsel of the assessee also placed written rejoinder to the written reply and submissions of the DR on the issue of mark to market losses, ld. Counsel submitted that the contentions of the ld. CIT DR are misconceived, that the assessee fails .....

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Ld. Counsel also pointed out that the assessee accounts for forward contract loss based upon a consistency followed by accounting policy as stated in its final audited statement and since all forward contracts are settled by the actual delivery of contracted amount, therefore, it is not a speculative transaction u/s 43(5) of the Act. Ld. counsel also pointed out that the assessee accounts for forward contract loss based upon consistency, followed by accounting policy as stated in its final audi .....

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nation (2) if actual delivery of the commodity or the scrips has taken place. Ld. Counsel lastly pointed out that in the similar set of facts and circumstances, the issue has already been decided in favour of the assessee by the Tribunal for AY 2008-09 in assessee s own case (supra). 39. On careful consideration of above submissions of both the sides, at the very outset, we find it appropriate to reproduce written reply of the ld. CIT DR on the issue of mark to market losses, written submissions .....

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- it had not clearly demonstrated that the hedging transactions were with respect to raw materials or merchandise: - the assessee is not a member of a forward market or an exchange. - The Company failed to demonstrate that the transactions in question were hedging transactions as no details were furnished. -the details of forex forward contracts were not linked to the trade/export. -FCs on certain dates could have been of higher value than the export receivables. As such, the assessee did not d .....

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td 2004 134 Taxrnan 376 (Bombay) and UT v. Soorajmull Nagarmull [1981] 129 ITR 169 (Cal) in the case of London Star Diamond Company (I) P. Ltd v. DCIT [2013] 38 taxrnann.com 338 (Mumbai- Trib.). Relevant extract of para 19 of the judgment reads as under: "Para /9. The above- .Although there is decision of the Tribunal where it is held that the FCs are not commodities, considering the judgment of Hon ble High court of Calcutta in the case of Sooraj Mull Magarmull supra, which was followed by .....

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t. Having held so, we shall now examine if the impugned contracts/transactions constitute "hedging transactions" and covered by the exclusion provisions of clause (a) to the proviso to section 43(5) of the Act. " Further, the paras 34, 35 & 36 of the order need to be examined in details so as to consider the nature of such losses which require detailed examination to see the allowabilty. In this case, the matter was set aside by IT AT on this issue as the assessee had not furn .....

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AO') and the CIT(A) disallowed the loss and treated the loss as 'speculation loss', relying on an instruction and circular issued by the Central Board of Direct Taxes (CBDT) regarding this matter (Instruction No.] 3 of 2010dated 23 March 2010 and Circular No.23 of 1960 dated 12 September 1960). In this case, ITAT Mumbai has drawn a distinction between hedging transaction and speculative transaction, observing that 'speculative transaction' is a contract for purchase or sale o .....

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umbai noted that as the assessee was a dealer in diamonds, hence only forward contracts in diamonds could be treated as hedging contracts. Further, the forward contracts for foreign exchange were closed without actual delivery. Assessee was also unable to establish that booking and cancellation of forward contracts of foreign exchange were in respect of specified export or import. Hence, the loss on forward contract on cancellation and marked-to- market on outstanding contracts as on year end on .....

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pect of such expenditure." The forex derivative contracts entered into in excess of the underlying foreign exchange exposure of the assessee are apparently in violation of the guidelines of RBl and FEMA and therefore hit by Explanation to S. 37(1). This explanation impliedly leads us to the conclusion that such losses on FCs are not allowable to the assessee. CBDT has also issued Instruction No. 03/20 I 0, dated 23-3-2010 to assessing officers regarding the loss on account of currency deriv .....

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es provided for in the books in respect of open contracts untenable. However, to be fair, it may also be pointed out that in the case DCIT v. Bank of Bahrain and Kuwait, (ITA Nos. 4404 & 1883/Mum./2004 reported in www.itatonline.org) the Special Bench of Mumbai ITAT, while holding that MTM losses in respect of forward foreign exchange contracts debited to profit and loss account is allowable, has made the following observations: (i) A binding obligation accrued against the assessee the minut .....

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date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing. (v) As per AS-II, 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. (vi) The forward foreign exchange contracts have all the trappings of stock-in- trade. (vii) In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd. .....

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loss and the issue of speculation under 43(5) was not an issue before the ITA T. On this background, the benefit of this Special Bench order for claiming allowability of MTM losses despite the instruction to the contrary by the CBDT is not available especially due to the facts that the assessee failed to discharge its onus on giving real time data. Besides, the assessee in our case is Engg. Service exporter whereas this AB order was rendered for a bank, so the business profile varies substantia .....

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ange traded currency future market in India. The committee submitted the report on May 29,2008 . RBI and SEBI are now cooperating and working together to manage this segment of future and option trading in India. Various currency derivatives have been introduced by NSE and MCX to make Indian Securities market globally competitive and larger. The issue therefore calls for detailed adjudication and is not covered in favour of the assessee. 40. We further find it appropriate to reproduce written su .....

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sentative (Ld. DR) in respect of the 'Mark to Market' loss of ₹ 21.80 crores as on 31.03.2009 on the foreign exchange forward contracts (FCs) It is humbly submitted that this Rejoinder may kindly be read along with the Corporate Tax Submission dated 17.06.2015 submitted before your Honours Rejoinder: l. The Ld. CIT (DR) has emphasized that the assessee fails to satisfy any of the clauses of the proviso to section 43(5) of the Act. Therefore, marked to market losses on FCs are not a .....

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15. The relevant provisions of section 43(5) which defines the term "speculative transaction" reads as under: .. (5) "speculative transaction" meansa transaction in which a contract for the purchase or sale 0/ any commodity. including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise enter .....

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ange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange: shall not be deemed to be a speculative transaction. "[Emphasis supplied] The facts of our case are:- i. The a .....

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sactions by entering into FCs with its Bank. IV. The assessee accounts for the FCs based upon a consistently followed accounting policy as stated in its audited financial statements (Pg 1 of Corporate Tax Submission dated 17.06.2015). V. FCs were taken from the authorized dealer Bank in terms of the FEMA regulations notified by the RBI. The RBI regulations (The Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000 read with, Schedule 1 of the Regulation-4-Ref. pgs .....

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discussed at Point No. 7 of our submission dated 17.06.2015 before, your Honours. Thus, there is no requirement for demonstrating rupee-wise and date-specific correlation of export receivables for being not considered as a speculative, transaction. VI. It is an undisputed fact that all FCs were ultimately settled by delivery of contracted US dollars. The Ld. DRP has verified all the Foreign Inward Remittance Certificates (FIRC) for receipt of US dollars against respective FC and it is not disput .....

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upreme Court in the case of Davenport & Co. P. Ltd. v. CIT, reported in (100 ITR 715), wherein the Apex Court has held as under: For income-tax purposes speculative transaction means what the definition of that expression in Expln. 2 says. Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of 'delivery' in S. 2(2) of the Sale of Goods Act which has been held to include both actual and .....

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xplanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning 10 that expression for purposes of income-tax only. "[Emphasis supplied] • In the case of Commercial Motors Ltd. v. Dy. CIT [2013J 218 taxmann.com 69(AII.)it was held that" .... the word "periodically" or "ultimately" makes it clear that the provisions of section 43(5) are applicable where a part of the contract or the entire contract has been settled o .....

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ntract is immaterial if actual delivery of the goods is absent. In fact, even in cases where the contract is highly speculative and amounts to a wagering contract, it was settled by actual delivery, for the purpose of section 43(5), it is not a speculative transaction. Thus the section dispenses with all other formalities except that there must be actual delivery or transfer of the commodity when the contract is settled. [Emphasis supplied] vii. It has been clearly demonstrated beyond doubt that .....

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o. Vs. DCIT 38 Taxmann.com 338 (Mum. Trib) and S.Vinodkumar Diamonds Pvt. Ltd. vs. Addt. CIT 35 taxmann.com 337 (Mumbai IT AT), is wholly misplaced as these judgments are in context of cancellation of forward contracts and consequential settlement of contract through payment of difference between the value of foreign exchange on the contracted rate in INR and the prevailing rate on the date of settlement. The Ld. CIT(DR) lost sight of the undisputed facts of the case that none of the FCs of the .....

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d out or alleged by either the Bank or the RBI against the assessee in respect of the FCs. Also, the RBI regulations permits taking FCs based on reasonable estimate export receipts as discussed above. It is undisputed that the value of FCs is more than the export sales and export receivables. Thus, it cannot be said that entering into FCs is in violation of the RBI guidelines and the allegation that it is hit by explanation to section 37(1) is misplaced. 4. Reliance on the CBDT Instruction No. 2 .....

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T is later in time as against the issuance of the CBDT instruction. It is also worth mentioning that the said instruction was specifically considered by the Hon'ble Delhi ITAT in the assessee's own case for AY 2008-09 and after considering it the Hon'ble Delhi IT AT decided the matter in favor of the assessee and the matter stands covered in favor of the assessee in the year under consideration. 5. The Ld. DR also referred to a report of a Committee formed by RBI and SEBI for analyzi .....

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mitted that the MTM loss for AY 2009-10 is allowable to the assessee based on the decision of the Hon'ble ITAT in assessee's own case for AY 2008-09 as there is no change in the facts and circumstances of the case. Further, to the extent of actual loss in the subsequent year has been allowed on cash basis by the Ld. AO/DRP in the Assessment Year 2010-11, which has been accepted by the Department. Thus, the whole dispute is regarding timing of allowance. Dated: 26.06.2015 41. At the very .....

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nge i.e. USD. The first of 9 contracts would mature on 3.4.2009, therefore contract would start maturing every succceding month and the last contract would mature on 4.12.2009. Undisputedly, the total value of forward contract was ₹ 19.50 crore and in accordance with its method of accounting, the assessee booked loss of ₹ 21.8 crore on the unexpired contracts as on 31.3.09 being the difference in the INR value of USD as on 31.3.09 with the value of which contracts were agreed to be s .....

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which is further associated with the accounts receivables and amount forecasted sales transactions. It was also pointed out that the fair value of forward foreign exchange contract which have been taken to cover foreign exchange risk in respect of probable forecasted transaction have a difference between the contracted rate and forward rate at the balance sheet date are recognised in the P&L account. He has drawn our attention towards assessee s paper book Volume II pages 470 to 476 to suppo .....

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as per CBDT Instruction No. 03/2010 dated 23.3.10 the AO recording losses on account of currency derivatives and as per these said instructions in respect of MTM losses debited to P&L account, AO instructed to disallow the same while computing the taxable income. Ld. CIT DR further submitted that as per said instructions in respect of actual crystallized loss, the AO is instructed to verify whether the losses are on account of speculative transaction as specified u/s 43(5) of the Act and to .....

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tional loss thereon cannot be claimed as allowable. 44. Ld. CIT DR fairly submitted that in the DCIT vs Bank of Bahrain and Kuwait (supra), Special Bench of ITAT while holding the MTM losses in respect of foreign exchange contracts debited to P&L account has held as allowable with certain observation but this creates a situation where on the other hand special bench decision allows MTM loss while on the other hand CBDT instructions mandates disallowance. It was also contended on behalf of th .....

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claiming allowability of MTM losses despite the instructions to the contrary by the CBDT is not available due to the fact that the assessee failed to discharge its onus on giving real time data regarding its claim, specially to demonstrate that the contracts were finalised and performed by way of actual physical delivery of foreign exchange resulting into booked/claimed losses therefrom. Ld. CIT DR finally prayed that the issue is not covered in favour of the assessee and this issue calls for d .....

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ng speculative losses and this contention is misconceived. Ld. Counsel further pointed out that as per relevant provisions of section 43(5) which defines the term speculative transaction, means transaction in which a contract for the purchase or sale of any commodity including stocks and shares periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. Ld. Counsel summarising his main argument also contended that the assessee is an exporter of se .....

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see accounts for forward contract based upon a consistently followed accounting policy as stated in its audited financial statement and forward contracts were undertaken from the authorised dealer bank in terms of FEMA regulations notified by the RBI and as per RBI regulations where the amount is not ascertainable, the forward contract may be taken on the basis of reasonable estimates expected export receipts. 46. Ld. Counsel has further drawn our attention towards order of ld. DRP and submitted .....

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en the value of foreign exchange in contract rate in INR and prevailing rate on the date of settlement. Ld. Counsel further contended that reliance placed by the ld. CIT DR on these judgements is wholly misplaced perhaps he lost sight of the undisputed fact that none of the forward contracts of the assessee were cancelled and all forward contracts were fully honoured by delivery of contracted USD. This fact was also verified by the ld. DRP in their order at page 3.7.1 at page 65 of paper book vo .....

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for AY 2008-09 on the similar set of facts and circumstances and hence the issue is squarely covered in favour of the assessee by this order of the Tribunal. 47. At the very outset, we respectfully take cognizance of decision of ITAT I Bench in assessee s own case for AY 2008-09 (supra) wherein the issue of mark to market losses has been decided in favour of the assessee with following observations:- 8. Coming to the corporate additions i.e. disallowance of loos, it clearly emerges from the rec .....

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ness. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon'ble Supreme Court judgment in the Case of Woodward Governor India P. Ltd. 312 ITR 254. Our view is further fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in A.Y. 2008-09. Therefore, the allowability of the loss on act .....

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ed. 48. In AY 2008-09, the claim of loss of ₹ 20,55,724 was claimed by the assessee with following submission and contentions:- "5.1 During the previous year 2007-08, the appellant entered into foreign exchange forward contracts with banks in order to hedge foreign currency fluctuation and incurred a (net) foreign exchange loss of ₹ 20,55,724/- as a result of marking to market the forward contracts that were outstanding on March 31, 2008. 5.2. Ld. Counsel for the assessee Shri S .....

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as raised only dispute that this loss is not allowable as deduction in the year of incurrence computed under mercantile system by following the accounting standards in this respect or at the time of realization of export proceeds on maturity of forward contracts. 49. Undisputedly, the facts and circumstances of the present case are more or less similar to the present AY 2009-10 and the assessee booked mart to market loss of ₹ 21.80 crore as on 31.3.09 being difference in the INR value of t .....

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thereafter noted that out of 9 forward contracts, the assessee has only used 4 forward contract fully and the assessee has not used these forward contracts immediately but started using them against the sale invoice after the lapse of time of few months. Ld. DRP further noticed that contract no. 1461 was used for the first time on 31.10.08 for a nominal sum of USD 632 and thereafter in November for USD 144247 and balance in December 2008 for USD 2755121. Thus, it shows that there was no underly .....

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ason that in this case, the FCs are not fully supported by the underlying export invoices both in terms of the amount as well as the tenor. Thus, an attempt was made by the Panel to ascertain as to what extent and how the assessee has used these FCs? The said position is given in the table below: DETAIL OF OUTSTANDING FORWARD COVERS AS ON 31ST MARCH, 2009, FOR WHICH INVOICING DONE TILL MARCH, 2009 Contract No. Contract Date Contract Value (US $) Invoice Date Invoice Amt. USD Invoice Amt.- INR Un .....

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00 3,100,000 Jan-09 Feb-09 Mar-09 637 1,041,624 2,057,739 YES YES YES 158594 3-Jul-09 146171 6-Aug-08 828,047 Mar-09 828,047 42,296,660 YES 159290 4-Aug-09 Sub-Total 12,728,047 12,728,047 628,559,352 Grand Total 146171 6-Aug-08 2,271,953 Beyond 31.3.09 NO 159290 4-Aug-09 146173 6-Aug-08 3,200,000 Beyond 31.3.09 NO 159930 4-Sep-09 146174 6-Aug-08 3,300,000 Beyond 31.3.09 NO 160558 1-Oct-09 146175 7-Aug-08 3,000,000 Beyond 31.3.09 NO 161236 4-Nov-09 146176 7-Aug-08 3,100,000 Beyond 31.3.09 NO 1620 .....

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8.2008 till 31st October 2008. The entire FC could be utilized only by 31st December 2008. Likewise the contract no. 146167 and 146169 taken on 6.8.2008 have been started to be used by the assessee from January 2009 onwards. Thus, there was no underlying asset for these contracts from 6.8.2008 till 31.12.2008. Out of the firth FC bearing no. 146171 only a small part of US$8.28 (total US$31 lakh) has been used by 31st March 2009 while the remaining 4FCs were not utilized at all till 31.03.2009. 5 .....

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