2018 (5) TMI 1240 - HC - Income Tax

Loss in connection with the hedging contract - business loss or speculative loss - Held that - Admittedly, the assessee is not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with the banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the Bank and thereby incurred certain expenses. These expenses the assessee claimed by way of expenditure towards business. We do not find that the transaction can be stated to be in speculation as to cover under sub-section (5) of section 43 of the Act. TDS u/s 195 - addition u/s 40(a)(ia) - assessee had not deducted tax at source on foreign commission payments - income accrued in India - whether the non-resident agent of the assessee was operating at his own level and no part of the income arose or accrued in India? - Held that - As decided in NOVA TECHNOCAST PVT LTD case 2018 (5) TMI 1182 - GUJARAT HIGH COURT Explanation inserted with retrospective effect provides that obligation to comply with subsection 1 of Section 195 would extend to any person resident or non-resident, whether or not non-resident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India - once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held in the case of GE India Technology Centre P. Limited 2010 (9) TMI 7 - SUPREME COURT OF INDIA , sub-section 1 of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India. - Decided against revenue

Summary

Issues:
1. Tribunal's treatment of loss from speculation business as hedging loss.
2. Addition made under section 40(a)(ia) for non-deduction of TDS on foreign commission payments.

Analysis:

Issue 1:
The first issue in this judgment concerns the Tribunal's decision on treating the loss incurred by the assessee in a hedging contract as a business loss rather than a speculative loss. The Assessing Officer contended that the hedging contract was speculative in nature and the expenses incurred were not allowable deductions. However, both the CIT (Appeals) and the Tribunal overturned this decision. The Court referred to a similar case involving export contracts and foreign exchange fluctuations, where the Bombay High Court held that such losses were allowable as business losses, not speculative losses. The Court emphasized that the assessee was not a dealer in foreign exchange and the hedging transactions were incidental to the regular course of business, making the losses deductible as business expenses.

Issue 2:
The second issue pertains to the addition made under section 40(a)(ia) for the non-deduction of TDS on foreign commission payments. The Assessing Officer added a sum under this section, alleging that tax should have been deducted on the foreign commission payments. However, the Tribunal found that the non-resident agent of the assessee operated independently, and no income arose in India. The Court cited a previous order dealing with a similar situation, where it was observed that tax deduction is only required if the payment is chargeable under the Act. The Court highlighted the importance of the expression "chargeable under the provisions of the Act" in Section 195(1) and noted that the obligation to deduct tax only applies if the payment is taxable under the Act. The Court dismissed the Tax Appeal, emphasizing that the payment to the foreign commission agent was not taxable in India, and therefore, tax deduction was not required.

In conclusion, the High Court upheld the Tribunal's decision on both issues, emphasizing the non-speculative nature of the hedging losses and the non-taxability of the foreign commission payments in India. The Tax Appeal was dismissed, affirming the Tribunal's rulings.