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2016 (1) TMI 648 - ITAT CHENNAI

2016 (1) TMI 648 - ITAT CHENNAI - TMI - Revision u/s 263 - claim of the assessee under section 10B wrongly allowed by AO - Held that:- In the absence of approval letter for 100% export oriented undertaking from the Board appointed on this behalf by Central Government in exercise of powers conferred by section 14 of Industries (Development and Regulation) Act, 1951 as specified under explanation (i) to section 10B of the Act, we are of the opinion that the ld. PCIT has rightly invoked provisions .....

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he ld. PCIT has accepted the claim of the assessee and directed the Assessing Officer to consider the claim of the assessee for deduction under section 10A in the light of evidences as may be filed by the assessee. In view of the above findings of the ld. PCIT, the assessee is required to file the evidences to claim deduction under section 10A of the Act before Assessing Officer for verification and to decide the issue in accordance with law. - Decided in favour of assessee for statistical purpo .....

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onsidered as speculative. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to section 43(5)(a) of the Act, such transaction shall not be deemed to be speculative transaction. Further, the currency cannot be treated as stock or shares because inherently they have different characteristic. Further, in the case of the assessee, the foreign exchange exposure for the relevant period specified by RBI regulatio .....

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ness transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. Further, the Assessing Officer has to see whether there is any premature cancellation of forward contract of foreign ex .....

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& Shri Vikram Vijayaraghavan, Advs. For the Respondent : Shri Joe Sebastian, CIT-DR ORDER PER: DUVVURU RL REDDY: This appeal filed by the assessee is directed against the order of the ld. Principal Commissioner of Income Tax - 6, Chennai, dated 16.03.2015 relevant to the assessment year 2009-10 passed under section 263 of the Income Tax Act, 1961 ["Act" in short]. Besides challenging the order passed by the ld. PCIT under section 263 of the Act, the assessee has also challenged th .....

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the notice under section 142(1) of the Act was also issued to the assessee. Further, the case of the assessee was referred to the Transfer Pricing Officer under section 92CA of the Act for computation of Arms Length price in relation to international transactions as there were international transactions to the tune of more than 50 crores. The ld. JCIT, TPO has passed order under section 92CA(3) of the Act, wherein no adjustments were suggested and the same was brought to the notice of the asses .....

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p of STP Unit II at Taramani, Chennai and the facility was later extended to five different places. Before the Assessing Officer, the assessee has submitted that the approval for setting up of the STPI Unit was obtained on 13.04.1999 and further units established were only in extension of the said facility and not new STPI units eligible to be counted as individual units for the purpose of deduction under section 10B of the Act. 3. The assessee company has stated to have incurred expenses in for .....

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rnia Software Co. Ltd. [2009] 27 SOT 51, the Assessing Officer excluded the expenses incurred in foreign currency from the export turnover and computed 10B deduction and determined the total taxable income of the assessee at ₹ 27,37,72,290/-. 4. After verification of the records, the ld. PCIT has observed that while passing the assessment order, the Assessing Officer has granted deduction under section 10B of the Act to the extent of ₹ 38,33,21,153/- and also an amount of ₹ 2,4 .....

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al Government in exercise of powers conferred by section 14 of Industries (Development and Regulation) Act, 1951, by invoking the provisions of section 263 of the Act, the ld. PCIT has held that the assessee is not eligible to claim deduction under section 10B of the Act. During the course of 263 proceedings, the assessee has submitted that the assessee derives its income from export of software and received income in convertible foreign exchange and therefore, eligible for deduction under secti .....

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rieved, the assessee is in appeal before the Tribunal and the ld. Counsel for the assessee has submitted that with regard to the claim of deduction under section 10B of the Act, the approvals given by different authorities were available and the claim of the assessee has to be sustained. 6. On the other hand, the ld. DR strongly supported the order passed by the ld. PCIT. 7. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The ld. PCIT h .....

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) "hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; 8. Before the ld. PCIT, the assessee has submitted that the following approvals are in existence in general for substantiating .....

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accepted by the Assessing Officer. Therefore, the ld. PCIT has held that the assessment order is erroneous and prejudicial to the interest of Revenue. In the absence of approval letter for 100% export oriented undertaking from the Board appointed on this behalf by Central Government in exercise of powers conferred by section 14 of Industries (Development and Regulation) Act, 1951 as specified under explanation (i) to section 10B of the Act, we are of the opinion that the ld. PCIT has rightly in .....

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n 10A of the Act. The ld. PCIT has accepted the claim of the assessee and directed the Assessing Officer to consider the claim of the assessee for deduction under section 10A in the light of evidences as may be filed by the assessee. In view of the above findings of the ld. PCIT, the assessee is required to file the evidences to claim deduction under section 10A of the Act before Assessing Officer for verification and to decide the issue in accordance with law. Accordingly, the ground raised by .....

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eated as speculative loss. With regard to the above, the AR of the assessee has submitted that only an amount of ₹ 89,59,571/- pertains to loss on foreign exchange forward contracts and that the company is primarily engaged in the business of providing typesetting and prepress services and solution provider for the publishing industry. It was also submitted that the assessee invoices its customers in foreign currency and in order to hedge against any risk of loss on currency fluctuations, .....

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against business income. 11. On being aggrieved, the assessee is in appeal before the Tribunal and the ld. Counsel for the assessee has submitted that the foreign exchange is neither commodity nor goods and therefore, the forward contract is not speculative, but it is a business loss. He also submitted that the loss on foreign currency forward contracts by a manufacturer/exporter is a "hedging loss" and not a "speculation loss". By rely on following decisions, the ld. Counse .....

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& 3072/Mds/2014 12. On the other hand, the ld. DR strongly supported the order passed by the ld. PCIT and submitted that the foreign currency derivate contracts are speculative in nature and therefore, loss arising out of the same has to be treated as speculative loss as defined under section 43(5) of the Act. 13. We have heard both sides, perused the materials on record and gone through the orders of authorities below. With regard to the loss arising on foreign exchange forward contracts i .....

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o forward contracts with the authorized dealer bank and therefore, it was the submissions of the assessee that the loss/gains from foreign exchange forward contracts, such loss/gain should be treated as loss/gain from business only. However, the ld. PCIT has held that since the assessee has not satisfied the condition laid down in the provisos (a) and (d) to section 43(5) of the Act, the transactions were not carried out through recognized stock exchange but through dealer banks, the forward con .....

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y way of foreign exchange forward contracts. In the case before us, the underlying exposure is the foreign currency viz., Eruo, USD and Great Britain Pound. The assessee company invoices its customers in foreign currency and in order to hedge against any risk of loss on currency fluctuations it enters into forward contracts with the authorized dealer bank. Upon the payment of the same, the exporter is hedged against adverse currency movement and also not liable to loose in case of favorable curr .....

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rcumstances, the issue under consideration before us is that, whether loss on account forex forward contracts are to be considered as a business loss in parlance with Section 28 of the Act. Further, in the case of the assessee before us, the following facts emerge and the legal issues involved are discussed and summarized herein below:- (i) The assessee has entered into forex forward contacts only in order to control the foreign currency fluctuation risk. (ii) Thus, the losses on account of fore .....

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n the case of Shri Capital Services Ltd Vs. ACIT in 121 ITD 498(Kol.)(SB) has held that foreign currency is neither commodity nor shares as defined under section 43(5) of the Act. (vii) Section 73(1) of the Act restricts the set off of speculation loss against the other business income in only those cases were speculative transactions carried on by the assessee are of such nature so as to constitute a business by itself. It is pertinent to mention here that RBI does not permit any bank under its .....

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39;s own. "Currency" is a generally accepted form of money including coins and paper notes which is issued by a government and circulated within an economy. It is a medium based on the value of an underlying commodity. It is used as medium of exchange for goods and services. The currency value of one country with another country fluctuates according to the economic factors prevalent in those countries. Therefore holding foreign currency is placing reliance on the economic factors preva .....

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lause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a .....

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d out in a recognized stock exchange;] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013)" shall not be deemed to be a speculative transaction. Explanation.-For the purposes of this clause, the expressions- (i) "eligible transaction" means any transaction,- (A) carried out electronically on screen-based systems .....

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ck exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 238 of the Securities Contracts (Regulation) Act, 195 .....

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ded through recognized stock exchange. 17. Now the question is whether to treat the foreign exchange forward contract as commodities, or stocks and shares. If it is treated as commodities, Section 43(5)(a) of the Act comes to the rescue of the assessee because in the present case, the assessee is engaged in the business of providing typesetting and prepress services and solution provider for the publishing industry. Further, the assessee company invoices its customers in foreign currency and in .....

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cy and stock/shares are not the same and therefore, currency cannot be held as stock or shares. This view is also fortified with the various decisions. (a) In the case of CIT Vs. Soorajmull Nagarmull, reported in (1981) 129 ITR 169(Cal.) wherein it was held that the assessee used to carry on export and import of jute business. In the course of normal business it used to enter into foreign exchange contracts in order to cover up loss and difference in foreign exchange valuation. The assessee util .....

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ss of export and import of jute goods. In order to carry out these transactions, the assessee had to enter into foreign exchange contract in order to cover up these transactions. In those foreign exchange contracts, if any loss occurred then such loss was a loss referable to and related to the business carried on and arising out of the business of the assessee. Here there is no finding that entering into foreign exchange contract was the nature of the business operation for the export and import .....

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before breach. Where the money which the assessee paid was in settlement of the amount of damages suffered by the assessee by reason of breach of the contract to delivery, it is to be held that the payment was not a loss from a speculative transaction as defined in Expln.2 of s.24(1) of IT Act, 1922. (b) In the case of CIT Vs. Badridas Gauridu (P) Ltd., reported in (2003) 261 ITR (Bom) wherein it was held that the assessee was not a dealer in foreign exchange. The assessee was a cotton exporter .....

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transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect to ₹ 13.50 lakhs as a business loss. This matter is squa .....

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capital receipt and not speculative profit. (d) In the case of Cotton Blossoms (India) Pvt. Ltd. V ACIT, in ITA No. 2032/ Mds/2012 vide order dated 21.02.2013, also the Chennai Bench of the Tribunal held that, in respect of forex contracts entered into by the assessee in similar circumstances will not fall under the definition of speculative transaction. (e) In the case of Majestic Exports v. JCIT in I.T.A. Nos. 1336 & 3072/Mds/2014 vide order dated 24.07.2015 [wherein the Ld. AM is author .....

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r and the Assessing Officer is directed to compute accordingly. This ground is allowed as indicated above. (f) in the case of VST Industries Ltd. v. Addl.CIT in I.T.A. No. 647/Hyd/2012 vide order dated 23.08.2013 [wherein the ld. Ld. A.M. is co-author], the Hyderabad Bench of the Tribunal, by following the coordinate Bench decision in the case of Leo Edibles & Fats Ltd. v. DCIT in I.T.A. no. 396/Hyd/2012 dated 31.05.2013 as well as by following the decision in the case of Friends and Friends .....

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w propounded in the judicial precedents discussed hereinabove, we are of the view that the assessee is entitled to claim the loss of ₹ 40,00,107/-. 18. Thus to sum up in the present case before us, the assessee is engaged in typesetting services for Scientific, Technical and Medical (STM Publishers) who has entered into forex forward contracts through its bankers with a view to effectively hedge its foreign currency risk. Therefore, these forex forward contracts have a close proximity or r .....

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