2014 (8) TMI 869 - AT - Income Tax

Damages for Breach of Contract considered as Speculation Loss Transaction treated as speculative transaction u/s 43(5) - Held that - Settlement of disputes allowing damages is termed as washed out contracts in international market - the orders for import were place with intention to take delivery as the assessee is in regular course of business - The amounts represents damages for breach of contract which does not fall within the purview of section 43(5) of the Act and the section is applicable only in case of settlement of contract where the payment is made without delivery of the goods - The provision of section 43(5) of the Act contemplates a transaction in which a contract for purchase of sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity - It is not only actual non-delivery of goods but it must be coupled with settlement of contract in a transaction for which payment is made - If the payment is by way of damages and not by way of settlement of contract then the question of actually delivery or transfer of goods would be irrelevant - The amounts paid has been made by way of damages for non-performance of a contract and that non-performance of contract was for business expediency as well as to reduce further losses that was beyond the control of the assessee - the losses claimed by assessee are allowable losses Decided in favour of Assessee. Amount for allowance of damages Revenue was of the view that any transaction not settled by actual Delivery or transfer is to be treated as speculative transaction without excluding trade related transaction from the term transaction - Held that - Factually revenue has not contested that this is a case of non-delivery of goods rather it is the case of breach of contract on account of delayed supply against sale contract, once this is the case, the amounts are for damages on account of breach of contract and it is allowable against the business income Decided against Revenue. Claim of discount allowed to customer - Price difference due to delayed supply to the parties specified u/s 40A(2)(b) of the Act Held that - For invocation of provision of section 40A(2)(b) of the Act, the revenue has to come out, in view of the holding pattern of the three companies, how these are related parties in term of section 40A(2)(b) of the Act - neither Sree Vegetable Oil (P) Ltd. nor Swastik Refinery Pvt. Ltd. or vice versa the assessee company Ambo Agro Products Ltd. holds the beneficiary ownership to the extent of 20% mentioned in Explanation (b) to section 40A(2)(b) of the Act the addition cannot be sustained. Delayed payment of employees contribution to PF and ESI u/s 43B Deposit of employees contribution to PF and ESI and other statutory funds were covered by provisions of Sec. 36(i)(va) r. w.s. 2(24)(x) and vide See. 36(i)(va) of the Act - Held that - Following the decision in CIT Vs. M/s. Vijay Shree Limited 2011 (9) TMI 30 - CALCUTTA HIGH COURT - the amendment to the second proviso to the Sec. 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988 - the deletion of the amount paid by the Employees' contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act - the assessee has paid the PF & ESI before due date of filing of return u/s. 139(1) of the Act by the assessee Decided against Revenue. Transfer pricing adjustment u/s 92CA(3) Determination of Arm's Length price - Held that - Both assessee as well as TPO has adopted CUP method for determining ALP and base rates for determining ALP used are MPOB published rates - the goods were supplied as per the contracts and at contracted price - The TPO has taken the price prevalent on the invoice date as against the contract date to compare it with the transaction price - This is not proper comparison because there is always a time gap between contract date and invoice date and prices fluctuate between these dates - Invoices are raised on the basis of accepted terms including rates as per the contracts entered earlier which are binding for all legal purposes - The CUP method as provided in Rule 10B(1)(a) suggests a comparison with price charged in a comparable uncontrolled transaction and it nowhere allows an assessing officer or TPO to make changes in the terms of contracts which were entered into with Associated Enterprise (AE) - The TPO has not considered the fact that transactions with non-AEs are also carried out by the assessee at contracted/invoiced rates notwithstanding the rates prevailing on the date of invoice. The assessee company has entered into contract of sale with its AE and after negotiations a contract price is agreed upon and invoice was raised - contract price is comparable to the market rate available on the day of contract - once the contract is entered into the goods are moved from export destination to import destination - there is a time gap between the contract date and the date of entry and because of this time gap between the contract date and entry date, there would be price fluctuation and the rates of other entities cannot be compared to the price reflected in the import invoices - there is no material to show that the price entered into between the parties on the date of contract was not comparable to similar transactions entered into on that date - price reflected in the sale contract entered into between the assessee and its AEs is very much comparable to the market rate prevailing on that date - there is no basis to disturb the price disclosed by assessee as the ALP for which the imports have been made - The adjustment made by TPO is not at all sustainable and DRP had rightly held so Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of damages for breach of contract (Sauda cancellation/settlement charges).
2. Allowance of damages for delayed or non-supply of goods under sales contract.
3. Disallowance of discount allowed to customers on account of price difference due to delayed supply.
4. Disallowance of deduction of PF and ESI contributions.
5. Adjustment to the income of the assessee as determined by the TPO under section 92CA(3) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Damages for Breach of Contract (Sauda Cancellation/Settlement Charges):
The primary issue was whether the damages incurred for breach of contract (Sauda cancellation charges) should be treated as speculative loss under section 43(5) of the Income Tax Act or as a business loss. The assessee argued that the transactions were genuine business expenses incurred due to falling market prices and were in the regular course of business. The AO, however, treated these transactions as speculative since they were settled without actual delivery of goods. The Tribunal, after considering the facts and relevant case laws, held that the damages paid for breach of contract do not fall within the purview of section 43(5) and are allowable as business losses. The Tribunal emphasized that the intention to take delivery was evident and the transactions were in the regular course of business.

2. Allowance of Damages for Delayed or Non-Supply of Goods Under Sales Contract:
The Revenue's appeal contested the allowance of damages for delayed or non-supply of goods under sales contracts, which the AO had treated as speculative loss. The DRP allowed these damages as business expenditure under section 37 of the Act, considering them as payments made due to business expediency. The Tribunal upheld the DRP's decision, confirming that these were damages for breach of contract and should be allowed against business income.

3. Disallowance of Discount Allowed to Customers on Account of Price Difference Due to Delayed Supply:
The assessee claimed rebates and discounts given to related parties under section 40A(2)(b) of the Act. The AO disallowed a significant portion of these discounts, alleging them to be excessive and a colorable device to reduce tax liability. The DRP partially upheld the AO's disallowance but allowed a correction of Rs. 15,00,000 for an invoice mistake. The Tribunal, after examining the shareholding patterns and relationships, concluded that the parties were not related under section 40A(2)(b) and deleted the disallowance.

4. Disallowance of Deduction of PF and ESI Contributions:
The issue was whether the delayed payments of employees' contributions to PF and ESI, which were made before the due date of filing the return, should be disallowed. The DRP directed the AO to allow these contributions, following the jurisdictional High Court's decision in the case of CIT v. M/s. Vijay Shree Limited, which held that such payments are deductible if made before the due date of filing the return. The Tribunal upheld this direction, dismissing the Revenue's appeal.

5. Adjustment to the Income of the Assessee as Determined by the TPO Under Section 92CA(3):
The TPO had made adjustments to the assessee's income based on the difference between the contract price and the market price on the date of the invoice. The DRP rejected this adjustment, stating that the contract price should govern the transactions, not the market price on the invoice date. The Tribunal agreed with the DRP, noting that the CUP method adopted by both parties should consider the contract date prices, not the fluctuating market prices at the time of invoice. The Tribunal confirmed the DRP's directions, dismissing the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the treatment of damages for breach of contract as business losses and upheld the DRP's directions on other issues, including the allowance of PF and ESI contributions, discounts to customers, and adjustments to income as determined by the TPO. The Revenue's appeal was dismissed in its entirety.