2018 (7) TMI 658 - HC - Income Tax

Speculative transaction - international price of crude palm oil and related products had declined during the relevant year and the same affected the Indian market - as per tribunal assessee had not taken delivery of a consignment of sugar and the assessee suffered damages as a consequence thereto - Held that - Tribunal noticed that the international price of crude palm oil and related products had declined during the relevant year and the same affected the Indian market. The Appellate Tribunal also found that the assessee wanted to guard against further loss by not taking delivery of the palm oil that had been ordered but by accepting the claims for damages upon the cancellation of the contracts. The Appellate Tribunal referred to Section 43(5) of the Act and the judgment of HANS MACHOO AND CO. case 2000 (9) TMI 50 - DELHI HIGH COURT in similar circumstances, held the assessee had not taken delivery of a consignment of sugar and the assessee suffered damages as a consequence thereof. The Appellate Tribunal in the present case relied on the reasoning in the Delhi judgement that what the assessee had done was to act in derogation of the terms of the relevant contract or commit a breach thereof as a consequence whereof it was liable to pay damages. Even if a party in breach accepts the claim for damages that the other party to the contract may put forward, what actually happens is the disposal of a dispute and not any settlement of the kind that is envisaged by the word settled used in Section 43(5) of the Act. Since the Appellate Tribunal relied on a legal proposition that has held the field for a considerable period, the order impugned does not warrant any interference on such score. Date which has to be reckoned for the purpose of determining the arm s length price in a contract with an associate concern - Held that - Not much has been said on behalf of the Revenue, particularly since the Dispute Resolution Panel accepted the assessee s contention that it is the rate indicated in the contract which has to be compared to the rate prevailing on the date of the contract rather than the rate prevailing when the invoice is raised. The Appellate Tribunal has merely endorsed the view taken by the DRP. Since it is a possible view taken after considerable deliberation and justified with reasons, the Appellate Tribunal s endorsement of such view of the DRP does not call for any reconsideration.

Summary

Issues:
1. Speculative transaction aspect in income tax assessment.
2. Determination of arm's length price in a contract with an associate concern.

Speculative Transaction Aspect:
The judgment by the High Court of Calcutta dealt with the appeal by the Revenue against an order of the Appellate Tribunal regarding two main issues. Firstly, the aspect of speculative transactions as raised by the assessing officer and upheld by the Dispute Resolution Panel was considered. The assessee did not honor its commitment to take delivery against some purchase orders on foreign sellers due to a decline in the price of palm oil. However, the assessee settled the matter by accepting the foreign sellers' claims for damages and claimed it as a loss. The Appellate Tribunal found that the international price decline of crude palm oil affected the Indian market, leading the assessee to avoid further loss by not taking delivery but accepting damages. The Tribunal referred to Section 43(5) of the Income Tax Act and previous judgments to support its decision.

Arm's Length Price Determination:
Secondly, the issue of determining the arm's length price in a contract with an associate concern was addressed. The Dispute Resolution Panel accepted the assessee's contention that the rate indicated in the contract should be compared to the rate prevailing on the date of the contract, not when the invoice is raised. The Appellate Tribunal endorsed this view, stating it was a possible view taken after deliberation and justified with reasons. The Tribunal's decision did not warrant reconsideration. The judgment referred to legal propositions that have been established for a considerable period to support the decision.

In conclusion, the High Court upheld the order of the Appellate Tribunal on both issues. The judgment disposed of ITAT No. 37 of 2015 and GA No. 542 of 2015, with no order as to costs.