2019 (12) TMI 974 - AT - Income Tax

TP Adjustment - ALP adjustment in respect of assessee s corporate guarantee provided to its overseas associate enterprise (AE) - HELD THAT - CIT(A) has followed his detailed discussion in assessment years 2007-08, 2009-10 and 2010-11 in assessee s case itself deleting identical ALP adjustment on the ground that a corporate guarantee does not amount to an international transaction in view of various judicial precedents i.e. Bharti Airtel Ltd. Vs. Addl. CIT 2014 (3) TMI 495 - ITAT DELHI , M/s Videocon Industries Ltd. vs. ACIT 2015 (2) TMI 631 - ITAT MUMBAI have also taken note of corresponding amendment in sec. 92B by way of explanation vide Finance Act, 2012 w.r.e.f 01.04.2002. We thus affirm the CIT(A) s findings going by the very analogy reject the Revenue s instant first substantive grievance. Addition u/s 14A r.w.s. 8D as well as consequential u/s 115JB computation - HELD THAT - We notice herein as well hon'ble jurisdictional high court s decision in CIT vs. Ashika Global Securities Ltd 2018 (7) TMI 1425 - CALCUTTA HIGH COURT holds that the impugned disallowance does not apply in absence of any exempt income. The same takes care of both the foregoing limbs of the impugned disallowance since the latter aspect of MAT computation has no legs to stand. This tribunal s decision in VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI has also settled the law that sec. 115JB MAT does not apply in case of sec. 14A disallowance. The Revenue fails in its second substantive grievance as well. Disallowance of foreign exchange loss - HELD THAT - there is no dispute on facts so far as all the corresponding items of the impugned foreign exchange loss are concerned. The Revenue s twin arguments, inter alia, are that Assessing Officer had rightly declined the impugned foreign exchange loss on the ground that neither there was any business exigency involved in cancellation of the assessee s forward contracts involving net loss of ₹51,77,406/- nor the sum of ₹74,39,71,483/- on account of revaluation; PCFC and ECB i.e. pre-shipment in foreign currency and external commercial borrowings; respectively could be taken as revenue items u/s 37(1) being notional capital loss(es). We see no reason to accept either of Revenue s twin arguments. Hon'ble apex court s decision in S.A Builders Ltd. vs. Commissioner of Income Tax 2006 (12) TMI 82 - SUPREME COURT has settled the law that the department cannot claim itself to be put in arm cheker of the businessman or the board of directors to decide as to in what manner a particular business is to be run. Taxpayer has also placed on record its bank advice regarding cancellation of forward contracts, accounting standards AS-11 prescribed by the ICAI stipulating that effect of exchange rate different in instances involving unsettled or unsecured transactions of foreign exchange during the relevant accounting period have to be recorded in the books. Case law i.e. DCIT vs. Bank of Bahrain and Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI holds that such losses are allowable u/s 37(1) of the Act. We hold in this factual backdrop that the CIT(A) has rightly deleted the impugned former loss figure disallowance. Repayment / revaluation of foreign currency PCFC loan - HELD THAT - The assessee admittedly recognized its revaluation loss qua its PCFC loan which had been availed exclusively for export import business. The relevant bank records to this effect forming part of case file suggests that the same was meant for importing coking coal and export of metcok only. There is further no indication that the impugned loans from M/s Standard Chattered Bank and M/s Yes Bank PCFC accounts had been availed for acquiring any capital asset - foreign exchange loss on account of revaluation of business loans in foreign currency deserve to be treated as revenue items allowable u/s 37 of the Act since incurred wholly and exclusively for the purpose of the assessee s business. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of arm's length price (ALP) adjustment for corporate guarantee.
2. Disallowance under section 14A read with rule 8D and its impact on section 115JB computation.
3. Disallowance of foreign exchange loss.

Detailed Analysis:

1. Deletion of Arm's Length Price (ALP) Adjustment for Corporate Guarantee:

The Revenue's primary contention was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in law and on facts by deleting the ALP adjustment of ?49,99,58,855/- related to the assessee's corporate guarantee provided to its overseas associate enterprise (AE). The CIT(A) had followed its previous decisions from assessment years 2007-08, 2009-10, and 2010-11, where it was held that a corporate guarantee does not constitute an international transaction, referencing judicial precedents such as Bharti Airtel Ltd. Vs. Addl. CIT and M/s Videocon Industries Ltd. vs. ACIT. The Tribunal affirmed the CIT(A)’s findings, rejecting the Revenue's grievance, emphasizing that the CIT(A) correctly followed the judicial precedents and the corresponding amendment in section 92B by the Finance Act, 2012.

2. Disallowance Under Section 14A Read with Rule 8D and its Impact on Section 115JB Computation:

The second issue concerned the disallowance of ?2,08,89,076/- under section 14A read with rule 8D and its consequential impact on the computation under section 115JB. The Tribunal noted the jurisdictional High Court's decision in CIT vs. Ashika Global Securities Ltd, which held that section 14A disallowance does not apply in the absence of exempt income. This decision also addressed the MAT computation under section 115JB, indicating that section 115JB does not apply to section 14A disallowance. Consequently, the Tribunal dismissed the Revenue’s second grievance, aligning with the legal precedent that exempt income is a prerequisite for section 14A disallowance.

3. Disallowance of Foreign Exchange Loss:

The third issue involved the disallowance of foreign exchange loss amounting to ?74,39,71,483/-. The CIT(A) provided a detailed discussion, noting that the assessee had booked the foreign exchange loss due to significant rupee depreciation against the US Dollar. The CIT(A) found that the Assessing Officer (AO) had erroneously considered the loss figure and did not account for the business expediency of the loss on premature cancellation of forward exchange contracts. The Tribunal agreed with the CIT(A), emphasizing that the AO had incorrectly disallowed the foreign exchange fluctuation loss by categorizing it as a notional loss not incurred in the normal course of business.

The Tribunal referenced the Supreme Court's decision in CIT vs. Woodward Governor India (P) Ltd., which held that foreign exchange fluctuation losses are deductible under section 37(1) if they are related to revenue transactions. The Tribunal also noted that the AO had allowed similar losses in other assessment years, indicating inconsistency in the AO's approach. The Tribunal upheld the CIT(A)'s findings, confirming that the foreign exchange loss on account of revaluation of business loans in foreign currency should be treated as revenue items allowable under section 37(1).

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all three issues. The Tribunal found no merit in the Revenue's contentions and upheld the CIT(A)'s detailed and reasoned conclusions, ensuring consistency with judicial precedents and the Income Tax Act provisions. The order was pronounced in the open court on 18/12/2019.