2018 (1) TMI 1555 - AT - Income Tax

TPA - Loss on cancellation/roll over of Forward Foreign Exchange Contract (FFEC) - HELD THAT - We find that the FAA had rejected the additional evidences produced by the assessee before him, that the assessee had submitted the Bloomberg data for five years, that the TPO in the AY.2009-10 accepted the five years data of Bloomberg and made no adjustment. In these circumstances, we are of the opinion that matter should be restored back to the file of TPO/AO for fresh adjudication to consider additional evidences filed by assessee before the FAA. He is directed to afford a reasonable opportunity to the assessee. Effective Ground of the appeal raised by the assessee is allowed in part. Income arising from forward exchange contract is assessable as capital gain - See CITIBANK OVERSEAS INVESTMENT CORPN., MUMBAI 2013 (1) TMI 997 - ITAT MUMBAI

Summary

Issues involved:
1. Treatment of loss on cancellation/roll over of Forward Foreign Exchange Contract (FFEC).
2. Classification of loss on extension of FFEC as capital loss or business loss.

Detailed Analysis:

1. Treatment of loss on cancellation/roll over of Forward Foreign Exchange Contract (FFEC):
The primary issue in this case revolved around the treatment of the loss incurred by the assessee on the cancellation/roll over of Forward Foreign Exchange Contracts (FFEC). The Transfer Pricing Officer (TPO) determined that the transactions were not at Arm's Length, resulting in a recommended adjustment of ?35.51 crores. The Assessing Officer (AO) held that the loss of ?52.10 crores on FFEC should be computed under the head income from other sources, and could not be carried forward or set off in subsequent years. The First Appellate Authority (FAA) upheld the adjustment made by the AO. However, the Tribunal noted that the FAA rejected additional evidences submitted by the assessee, which included Bloomberg data for five years. The Tribunal decided to restore the matter back to the file of TPO/AO for fresh adjudication considering the additional evidences, directing them to afford a reasonable opportunity to the assessee. The effective Ground of appeal raised by the assessee was allowed in part, indicating a favorable outcome for the assessee in this regard.

2. Classification of loss on extension of FFEC:
The second issue involved the classification of the loss on extension of FFEC as either capital loss or business loss. The FAA had held that the loss suffered by the assessee constituted capital loss, while the AO contended that it should be considered as business loss. The Tribunal referred to a previous order for AY 2006-07 where a similar issue was decided. The Tribunal analyzed the nature of income from settlement of forward exchange contracts and cited relevant case laws to support the contention that such income should be treated as capital gain. The Tribunal followed the consistent view that income arising from forward exchange contracts should be assessable as capital gain. Consequently, the Tribunal dismissed the grounds raised by the revenue and partly allowed the grounds raised by the assessee. The Cross objection of the assessee was treated as infructuous as the effective Ground of appeal had already been restored back to the file of TPO. Ultimately, the appeal of the assessee was partly allowed, while the appeal of the AO was dismissed.

In conclusion, the judgment addressed the issues related to the treatment of losses on FFEC transactions and the classification of such losses, providing detailed analysis and legal reasoning to support the decisions made by the Tribunal.