2019 (11) TMI 95 - AT - Income Tax

Deduction on account of washout charges - cancellation of expired contract - whether there was an extension of contract or not as the said document i.e. fax transmission dated 10.01.2005 was not before the TPO? - TPO came to conclusion that it was not a case of cancellation of contract, but a case of cancellation of expired contract, as the said contract was valid for the month of January, 2005 itself - TPO did not accept the plea of the assessee was that the reason for not shipment of balance amount was not explained by the assessee - HELD THAT - There was a contract between the parties to purchase the goods in the month of January, 2005. Only part of goods could be purchased by the assessee, as the supplier of the goods had requested for an extension of contract i.e. to extend the period of shipping/delivery. The communication is dated 10.01.2005 and is also prior to shipping of part of the contract received by assessee. The reason for extending the contract was also mentioned in the said letter itself i.e. availability of the vessel at the end of February, 2005. Simultaneously, there was fall in the prices of crude soyabean oil and as a business decision, the assessee communicated to LD Asia, supplier, to cancel the delivery of balance goods. The said decision was taken in order to save the losses that the assessee would have incurred after receipt of the balance crude soyabean oil, as the market had collapsed and the assessee could not have been in a position to sell the goods on profit. Another aspect of issue is that in order to make the aforesaid payment to LD Asia, permission had to be sought from RBI, for such remittance. The permission had been awarded by the RBI, consequent to which only the assessee made the payment to LD Asia. In such a scenario on the ground that the extension of contract, not being available before the TPO, could not be the reason to deny the claim of the assessee, especially where the assessee claims that it had filed the same before TPO. The said communication was filed before the CIT(A), who had accepted that there was fall in prices in the soyabean oil in the market. The only objection was whether there was a valid contract of 2/3rd February, when the contract was cancelled. We find no merit in the orders of the authorities below in this regard as the contract was between the two parties and in case of business exigencies they took a decision to extend the contract and the said contract was then cancelled between the parties because of the market conditions. The payment of the washout charges has been made after sanction of RBI and in such circumstances, we hold that the assessee is entitled to claim deduction of ₹ 1.65 crores. Accordingly we hold so. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the CIT(A)'s order confirming the addition of washout charges to the appellant's income.
2. Determination of the arm's length principle in the international transaction of payment of washout charges.
3. Computation of interest under sections 234B and 234D of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A)'s order confirming the addition of washout charges to the appellant's income:
The appellant contested the CIT(A)'s decision to uphold the addition of ?16,553,271 to their income, arguing that the CIT(A) erred in both facts and law. The primary contention was that the CIT(A) failed to appreciate the facts and legal principles surrounding the washout charges. The appellant had entered into a contract on 04.01.2005 to import 10,000 MT of crude soyabean oil from its AE at USD 546 PMT, with the shipment scheduled for January 2005. However, only 3,064.618 MT was imported, and the remaining 6,922 MT was not purchased due to a price fall. The appellant compensated the AE at USD 55 PMT for the washout quantity, incurring a loss. The TPO and CIT(A) held that the contract had expired by 03.02.2005, and thus, no liability for washout charges existed. The CIT(A) also doubted the authenticity of the appellant's evidence and did not consider the regulatory approval from the RBI.

2. Determination of the arm's length principle in the international transaction of payment of washout charges:
The TPO applied the Comparable Uncontrolled Price method (CUP) and proposed an addition of ?9,32,747, which was later deleted. The TPO further noted that the appellant's operations and transactions were consistent with market conditions and involved regular import and export activities. The appellant argued that the washout charges were a commercial decision due to the steep fall in oil prices, supported by evidence from the soyabean processor association and recognized brokers. The TPO, however, concluded that the contract had expired by February 2005 and thus, the arm's length price of the washout charges was zero. The CIT(A) upheld this view, stating that there was no valid contract extension and the evidence provided by the appellant, including the letter dated 10.01.2005, was not reliable.

3. Computation of interest under sections 234B and 234D of the Income-tax Act, 1961:
The CIT(A) proposed directing the AO to compute interest under sections 234B and 234D. The appellant argued that the CIT(A) grossly erred in this proposal, considering the circumstances and the nature of the transactions.

Conclusion:
The Tribunal found that there was indeed a valid contract between the parties, extended by mutual agreement as evidenced by the fax dated 10.01.2005. The appellant's decision to cancel the contract due to market conditions was a legitimate business decision. The Tribunal held that the payment of washout charges was justified, especially since the RBI had approved the remittance. Consequently, the addition of ?1,65,53,271 to the appellant's income was deleted, and the appeal was allowed. The Tribunal did not find merit in the orders of the authorities below regarding the contract's validity and the arm's length price determination. The Tribunal's decision was pronounced on 31st October 2019.