TMI Blog2017 (4) TMI 1009X X X X Extracts X X X X X X X X Extracts X X X X ..... of UFO Movies India Ltd Vs ACIT [2016 (2) TMI 196 - ITAT DELHI] Forex derivative loss - speculative and notional loss not allowable for set-off against taxable income - Held that:- All the derivate transactions are specific hedging transactions against foreign exchange transactions of the assessee and are to be treated as integral part of the business transactions of the assessee. These transactions, by no stretch of logic, cannot be treated as standalone transactions, and as such loss on these transactions cannot be treated as loss from speculation business ineligible for set off against normal business profits. As for the CBDT instruction relied upon by the Assessing Officer, such instructions do not bind the appellate authorities, and nothing, therefore, turns on the same- so far as our adjudication is concerned. The losses on account of foreign exchange contracts are bonafide expenses incurred in furtherance of legitimate business interests of the assessee and are to be allowed as deduction under section 37(1) as such - Decided in favour of assessee - ITA No.472/Ahd/2014 - - - Dated:- 11-4-2017 - Pramod Kumar AM and Rajpal Yadav JM For The Appellant : G.C. Pipara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2% rate applied in previous year has been disputed by the appellant company 3. Learned representatives fairly agree that these issues are covered against the assessee in principle but in favour of the assessee on quantum of ALP adjustment, by decision of a coordinate bench of this Tribunal, in the assessee s own case for the assessment year 2007-08 - also reported as [(2015) 154 ITD 745 (Ahd)], wherein the coordinate bench has, inter alia, concluded as follows: 5. As learned counsel for the assessee rightly points out, so far as Perot System s case (supra) is concerned, the argument of loan being in quasi capital was rejected on facts, though the core legal issue, i.e. whether ALP adjustments will also be warranted in case of interest free loans extended as quasi capital, was left open. It was stated so in the case of Micro Inks Ltd Vs ACIT [(2013) 157 TTJ 289 (Ahd)]. The question, however, arises as to what are the connotations of expression quasi capital in the context of the transfer pricing legislation. 6. Hon ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(1)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression quasi capital , in our humble understanding, is relevant from the point of view of highlighting that a quasi-capital loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned, this cannot be nil because, under the comparable uncontrolled price method, such other transactions between the independent enterprises cannot be at nil consideration either. Nobody would advance loan, in arm s length situation, at a nil rate of interest. The comparable uncontrolled price of quasi capital loan, unless it is only for a transitory period and the de facto reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. As for the intent of the assessee to treat this loan as investment, nothing turns on it either. Whether assessee wanted to treat this loan as an investment or not does not matter so far as determination of arm s length price of this loan is concerned; what really matters is whether such a loan transaction would have taken place, in an arm s length situation, without any interest being charged in respect of the same. As for the contention regarding crucial role being played by, or visualized for, this AE, there is no material on record to demonstrate the same or to justify that even in an arm s length situation, a zero interest rate loan would have been justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Hon ble Courts above. Ground no. 1 and 2, therefore, have to be decided against the assessee and the impugned action of the authorities below, in principle, is to be confirmed. 7. Coming to the quantum of addition, we find that the approach adopted by the authorities below is not justified and cannot meet any judicial approval. The adjustment on account of guarantee fees, as made by the TPO, it is wholly unwarranted as no such guarantee is given and, as such, there is no such transaction for determination of arm s length price. In any event, as regards the question as to whether an additional arm s length price adjustment on account of higher risk of lending to a low rated subsidiary is required, this issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of UFO Movies India Ltd Vs ACIT [(2016) 131 DTR 81 (Del)]. This decision, inter alia, observes as follows: 5. We have noted that there is no dispute that the LIBOR rate, so far as the relevant previous year was concerned, is to be taken at 4.53%, as the TPO himself has, pursuant to the directions of the DRP to adopt ALP at LIBOR+4%, taken the ALP at 8.53%. The order dated 19th March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR , and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4% to 1.7% band over LIBOR respectively. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted . 65. That leaves us with third point of difference between the assessee and the TPO and that is with regard to adjustment of 177.60 points, as balancing figure, towards lack of security and lender not being in the business of borrowing and lending mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pprove the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows: 8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted. 9.................. 10. The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis. 11. This Court is of the opinion that the reasoning of the IT AT on each of the heads which went ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of ₹ 15,02,592/- made by the AO on account of disallowance of 1/5th of GDR Issue expenses claimed by the company as allowable deduction u/s.35D of the Act on the ground that the expenses incurred for issue of share capital is capital loss to the company. In view of facts and submissions filed as well as legal position, the impugned addition of ₹ 15,02,592/- requires to be deleted. The learned CIT(A) has erred in law and on facts in confirming the action of the Assessing Officer in holding that the loss due to foreign exchange fluctuation amounting to ₹ 5,46,50,757/- being relatable to GD issue is a permanent capital loss of the company and hence benefit of capitalization of the said loss in future will not be available to the company. In view of facts and submissions filed as well as legal position, the observation and findings of the AO though not having any revenue effect during the year under consideration requires to be quashed/vacated and the said loss of ₹ 5,46,50,757/- being on revenue account requires to be allowed as a deduction and the total income be revised accordingly. 11. Learned representatives fairly agree that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, and, in a situation in which the expenses are incurred after the commencement of business, the expenses should be incurred for extension of his undertaking or setting up of a new industrial undertaking. This condition is clearly not satisfied on the facts of the present case as the expenses are incurred after the commencement of the business and it is not even assessee s case that the expenses are incurred for extension of his undertaking or for setting up of new industrial undertaking. As for the decision of a coordinate bench, in the case of Mahindra Mahindra Ltd Vs JVIT [(2010) 36 SOT 348 (Bom)], this decision was in the context of foreign currency convertible bonds which were debt instruments, though convertible into equity at a later stage. That decision has no bearing on the facts of this case. In view of these discussions, we see no merits in this grievance of the assessee either. The stand of the authorities below does not call for any interference. 12. As learned counsel for the assessee has fairly conceded that these issues must be decided against the assessee at this forum, and that he will carry the matter, if so advised, in further appeal before Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 17. We have noticed that, as evident from a plain reading of the assessment order, the short case of the Assessing Officer is that since the transaction leading to the impugned loss is a speculative transaction, under section 43(5) of the Act, the loss incurred on the transaction is required to be treated as loss from speculative business which cannot be set off against income of the assesse under the head profits and gains from business and profession . However, in our considered view, this approach itself proceeds on the fallacy that every loss, in the course of or due to a speculative transaction, is to be treated as loss of the speculative business. Explanation 2 to Section 28 states, Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation business shall be deemed to be distinct and separate from any other business , which implies it is only when speculative transactions are of such a nature as to constitute business on standalone ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
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