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TMI Blog2021 (4) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... invoke the provisions of section 40A(2) of the I.T.Act. See M/S. HERBALIFE INTERNATIONAL INDIA PVT. LTD. [ 2015 (10) TMI 2794 - ITAT BANGALORE] AO has not compared the reasonableness of payment with respect to fair market value of services provided by RNA vis- -vis outside parties. The Hon ble Delhi High Court in the case of CIT v. Nestle India Ltd. [ 2011 (5) TMI 566 - DELHI HIGH COURT] had held that once the assessee has discharged initial onus, the burden would be shifted to the Revenue to show that the expense was unreasonable and excessive having regard to the legitimate needs of business based on material or evidence on record and that the assessee had made less than ordinary profits . Thus we are of the view that the A.O. has erred in invoking the provisions of section 40A(2) of the I.T.Act to disallow the claim of expense as excessive and not legitimate to the business needs, especially in view of the fact that the TPO, in its transfer pricing orders for assessment years 2008-2009 and 2010-2011, had held the impugned transaction at arms length. Disallowance of said expenditure u/s 37 - RNA has rich experience in setting up, running of stores and other related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act Black s Law Dictionary (8th Edition) defines the term commodity as an article of trade or commerce; the term embraces only tangible goods, such as products or merchandise, as distinguished from services; an economic good, especially a raw material or an agricultural product. As decided in MUNJAL SHOWA LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX. [ 2003 (6) TMI 188 - ITAT DELHI-E] foreign currency does not fall within the purview of the term commodity and hence this characteristic of a speculative transaction is not satisfied. Since, the definition of speculative transaction itself is not applicable to the assessee s case as all the conditions were not satisfied, treating the transaction as speculative in nature is not sustainable in law. Therefore, we hold that the CIT(A) is correct in deleting the disallowance of premium on forward contract and no interference is called for. - Decided in favour of assessee. - ITA No.2258/Bang/2016, ITA No.2259/Bang/2016, CO No.62/Bang/2017, CO No.63/Bang/2017 - - - Dated:- 19-4-2021 - Shri George George K, JM And Shri B.R.Baskaran, AM For the Assessee : Sri.K.R.Vasudevan, Advocate For the Revenue : Ms.Neera Malh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etting up stores were capitalized in the books of account of the assessee and depreciation was claimed accordingly. As regards professional fees for post set up of stores (for running the store by RNA), the same is claimed by the assessee as revenue expenditure. For rendering of professional services, a consultancy agreement was executed between the assessee and RNA on 15.12.2004. 4.1 The Assessing Officer for assessment years 2008-2009 and 2010-2011 disallowed the professional fees paid by the assessee to RNA by stating following reasons:- (i) The payments made to RNA were unreasonable and excessive and without legitimate need of business. (ii) The assessee has full-fledged management team with expertise needed to execute such operations and there was no such necessity to procure services of RNA. (iii) According to AO, the employee cost incurred and legal and professional charges paid during the year added to its overall conclusion of it being unreasonable and excessive. (iv) Alternatively, for disallowance under section 37 of the Act, the AO concluded the payments to be not incurred exclusively for the purpose of business. 4.2 Aggrieved, the assessee preferred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fair market value and provisions of section 40A(2) of the I.T.Act are not automatic. It was further stated by the learned AR that since in the facts of this case, the A.O. has not proved that the expenditure incurred is in excess of fair market value, provisions of section 40A(2) of the I.T.Act does not have application. 4.5 We have heard rival submissions and perused the material on record. In the instant case, the admitted facts are RNA is an associate enterprise of the assessee and professional fees paid by the assessee to RNA was considered by the assessee as an international transaction in its transfer pricing study and also disclosed in Form 3CEB. During the course of assessment proceedings for assessment years 2008-2009 and 2010-2011, the A.O. referred the said international transaction to the TPO for determining the arms length price. The TPO by orders for the assessment years 2008-2009 and 2010-2011, came to the conclusion that no adjustment is required as the impugned transaction is at arms length. The Assessing Officer has not relied on the order of the TPO and has gone ahead by disallowing the professional fees paid u/s 40A(2) of the I.T.Act. In the case of Orac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the department that the services were rendered by the AE to the assessee in India. We further note that the AO has not conducted any inquiry or investigation to find out the excessiveness of the payment made by the assessee to its AE. 4.5.1 Moreover, the AO has not compared the reasonableness of payment with respect to fair market value of services provided by RNA vis- -vis outside parties. The Hon ble Delhi High Court in the case of CIT v. Nestle India Ltd. reported in [2011] 11 taxmann.com 106 (Delhi) had held that once the assessee has discharged initial onus, the burden would be shifted to the Revenue to show that the expense was unreasonable and excessive having regard to the legitimate needs of business based on material or evidence on record and that the assessee had made less than ordinary profits . The Bangalore Benches of the Tribunal in the case of Manipal Health Systems Private Limited (supra) had held that onus is on the A.O. to bring on record comparable cases to prove that payment made by the assessee is in excess of fair market value and the provisions of section 40A(2) of the I.T.Act are not automatic . The relevant finding of the Tribunal reads as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the TPO, in its transfer pricing orders for assessment years 2008-2009 and 2010-2011, had held the impugned transaction at arms length. 4.5.3 The A.O. has also disallowed the said expenditure u/s 37 of the I.T.Act considering that it is not incurred wholly and exclusively for the purpose of business or profession. The Assessing Officer has disallowance u/s 37 of the I.T.Act without stating the reason as to why the expenditure is considered to be not incurred wholly and exclusively for the purpose of business. As per section 37 of the I.T.Act, expenditure laid out and expended wholly and exclusively for the purpose of business or profession shall be allowed as deduction while computing the business income. To qualify as a business expenditure, the following the conditions are to be satisfied :- (i) expenditure must be revenue in nature; (ii) expenditure should not be in the nature of capital expenditure or transfer expense; (iii) expenditure should not be in the nature of fine or penalty; (iv) expenditure should be expended wholly and exclusively for the purpose of business. 4.5.4 The assessee had entered into consultancy agreement dated 15.12.2004. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case it is settled position in law that no businessman can be compelled to maximise his profits . 4.5.6 The above judgment of the Hon ble Delhi High Court was confirmed by the Hon ble Apex Court in the case reported in [2007] 288 ITR 1 (SC). 4.5.7 For the aforesaid reasoning and the judgments relied on, we are of the view that the A.O. is not correct in disallowing the expenditure also u/s 37 of the I.T.Act. 4.5.8 Now coming to the decision relied on by the learned DR, we are of the view that the above orders of Bangalore Bench of ITAT are distinguishable on facts. In the cases cited by the learned DR, the TPO had made adjustment to the arms length price, whereas, in the instant case, the TPO has accepted the international transaction at arms length and no adjustment was made. Therefore, the case laws cited by the learned DR has no application to the facts of the instant case. Hence, ground Nos. 2 and 3 of the Revenue are rejected. Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that, the impugned forward-contracts were entered to hedge the import payments working capital loans, in the attempt to secure from foreign exchange risk, which is found to be in the course of its routine business activity. The consideration being paid to the Bank is typically in the nature of Bank charges, which therefore essentially assume a revenue-character, in the present circumstances. The Assessee has disputed the AO s stand that, the present transactions would fall under the `speculative definition in terms of section 43(5) of the I.T. Act. It is pointed out that, out of the conditionalities specified in section 43(5) for a transaction to be considered speculative, several of these are not met in the present case. It is submitted that, a forex-cover being in nature of a contract for sale, thus the first characteristic as per section 43(5) is met in the present situation. It is contended that, the impugned purchases should be of shares /stocks or commodity, to constitute a speculative transactions as per section 43(5). Since, in the present case, forex-cover is not a contract for purchase of shares / stock or commodity, but towards foreign currency, the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exchange, which is the bank in this case, in order to obtain protection from fluctuation of foreign exchange rates is a revenue expenditure . 5.6 As per section 43(5) of the I.T.Act, speculative transaction means a transaction in which the contract for purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The definition also provides for certain exceptions. A speculative transaction is characterized by four features, namely - (i) it is a contract for purchase or sale; (ii) The purchase or sale should be of a share, stock or commodity; (iii) There should be periodical or ultimate settlement of the contract; (iv) Settlement to be otherwise than by actual delivery or transfer. 5.7 In order to attract the definition of a speculative transaction, all the characteristics mentioned in the said definition is required to be satisfied. Definition of a speculative transaction vis-a-vis forward cover are as follows:- (i) A forex cover is a contract for purchase or sale and thus the first characteristic as per section 43(5) is satisfied. The third ..... X X X X Extracts X X X X X X X X Extracts X X X X
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