9911796707
TMI Blog2014 (8) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the Ld. DRP/AO erred in treating speculation transactions as speculation business. Without appreciating the fact that speculative transaction does not amount to speculative business and assessee has never been held to be in such business. 1.6. The Ld. AO ought to have allowed the loss as speculation loss as held by him in the draft asst. order. Revenue's ground is as under: 1. In the facts and circumstances of the case, Ld. D.R.P. erred in issuing directions not to treat Sauda Settlement Charges as speculation loss by ignoring provisions of See. 43(5) of the Act which clearly indicates 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 . 3. Briefly stated facts relating to the above issue are that during the year under consideration, the assessee claimed loss of ₹ 23,48,59,500/- on account of sauda cancellation charges. The assessee claimed this loss due to the cancellation of eight transactions during the year entered through sauda agreement. The assessee also claimed loss on account of settlement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.Mantora Oil Products Limited of Kanpur 25.10.2008 5,60,00,000 Contract dated: 21.08.2008 just 2 days before MOU dated: 23.08.2008 for Slump Sale of Haldia unit The AO noted that the assessee has accepted all the debit notes of the above three parties, according to their demand and debit notes without any arbitration. He further noted that Sauda cancellation charges are adjusted on account of known parties without actual delivery of goods and accordingly he noted facts, which are summarized as under: (i) Sing Global Oil Products Ltd. is based at Singapore and one of the raw material suppliers (ii) Mantora Oil Products Ltd. had neither supplied any goods nor any other kind of transaction during this year except this transaction resulting in loss to the assessee, which was also resulted without delivery of any goods to the assessee and (iii) K..S. Oil Ltd, which has supplied goods to the assessee during this year. But K.S. Oils Ltd. had already signed an MOU on 23.8.2008to purchase the manufacturing unit of the assessee at Haldia. (iv) It is pertinent to note that the all c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s. 144C(2)(b)(i). The D.R.P on examination of the facts and circumstances of the case rejected the assessee's objection vide it's order u/s. 144C(5) dated. 22/11/2013 received by the undersigned on 10/12/2013. The relevant part of para of the D.R.P's conclusion in page.24 is reproduced as under, The purchase transactions said to Have been undertaken by the assessee which resulted in sauda cancellation losses appear to be accommodative nature and cannot be said to be attributable to the business of the assessee. The methodology adopted by the assessee in our considered view seems to be with the intent to save himself from tax liabilities arising out of the sale of business assets as discussed above. Accordingly the objection raised by the assessee is not sustainable and the objection raised on this ground is rejected. In view of the above decision of the Dispute Resolution Panel, the claim of loss on account of Suada Cancellation Charges of ₹ 23,48,59,500/- is disallowed.' Aggrieved the assessee came in appeal before us against the directions of DRP as well as against assessment order. 4. The undisputed facts are that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the above facts that the intention of booking such huge losses was on the pretext of purchase agreement for crude palm oil, crude soya refined oil and that also without taking delivery of goods. According to the AO, the intentions of assessee are very clear. The ld. Counsel for the assessee made argument that the AO erred in pointing out that clause 3.4 of the Business Transfer Agreement (BTA) is only to create liability of selling merchandise before completion of financial year because it was going to be ceased from the hands of the assessee due to execution of slump sale price but leaving not an iota of scope of loss as the inventory or closing stock on the date of transfer of manufacturing unit would be at cost only. Thus, the question of future fluctuation of price at the time of delivery of finished goods to the buyer of the assessee does not arise and therefore, exceptional provisions of clauses (a), (b), (c) and (d) of section 43(5) are not applicable to the facts of the assessee's case. Ld. Counsel for the assessee further made the following submissions: 1. All these contracts are valid contract duly enforceable under the law and executed in similar ways as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee due to non-supply of material on due date to its buyers. Hence damages paid for breach of contract on purchase of CPO RBD Palmolein should also be allowed as business expenditure u/s 37 of the Act.' 6. On the other hand, the ld. CIT,DR, Shri Ravi Jain heavily relied on the order of DRP and that of the AO. The ld. CIT,DR made argument that the unique feature in the transactions claiming loss by the assessee is that these transactions are without delivery of goods and in such circumstances, the AO has rightly treated these transactions as speculative loss. The ld. CIT, DR heavily relied on the decision of the Hon'ble Supreme Court in the case of CIT v. Shantilal (P.) Ltd. [1983] 144 ITR 57. 7. We have heard rival contentions and gone through the facts and circumstances of the case. First of all, we find that the AO treated the damages incurred and paid for breach of contract i.e. price difference on account of Sauda Cancellation of purchase in the course of manufacturing business as a speculative transaction under section 43(5) of the Act and treated such loss as speculative loss instead of business loss. The AO's main objection was that all such debits wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of regular business of the assessee. (ii) Quantum of RBD Palm Olein: It may be noted that during the relevant previous year, total purchase contracts for RBD Palm Olein were for about 25432.335 MT. Out of which, the contracts which could not be executed and damage/ compensation in respect of which had to be paid were in respect of only 6000 MT. These were in the course of regular business of the assessee. Such contracts are therefore not separate or distinct from the normal business of the assessee. Please refer Explanation 2 to section 28 . The assessee has produced the details of loss caused in respect of purchase contract which were cancelled. The supporting evidences, like copy of purchase contract, debit notes, etc. were also filed before lower authorities. The assessee also filed bank statement and copy of party ledgers. The assessee received proper permission from RBI for making remittances to such parties. The above transactions, according to us, were in the regular course of business and were done considering the market conditions and business expediency. In view of the falling prices and with a view to avert possible losses, the assessee declined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settlement of such disputes allowing damages is termed as washed out contracts in international market. The assessee's contention was that the orders for import were place with intention to take delivery as the assessee is in regular course of business. The above provision of section 43(5) of the Act contemplates a transaction which a contract for purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. In case of speculation business, the intention from the very beginning is not to take delivery but only to settle the account for a price difference. In the present case the facts states the intention of the assessee that it was to take delivery as is evident from the conduct of the assessee in respect of various contracts with the same parties, which were already honoured when the market condition was not so unfavourable. We find that the assessee had to decline supply of certain quantities in pursuance of some of the contracts due to business expediency and compelling circumstances as a result of falling trend in prices and accordingly, had to make the payment by way of damages. Similar view has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smuch as neither the Assessing Officer nor the Commissioner of Income Tax (Appeals) has returned any finding that the transactions in question constituted a speculative business. As a result, no substantial question of law arises for our consideration'. 10. Further Hon'ble Madras High Court in the case of CIT v. Sri Ramalinga Choodambigai Mills Ltd. [1999] 239 ITR 120discussing the provision of section 43(5) read with Explanation (2) to section 28 of the Act, in the similar circumstances has held as under: The contracts had been entered into, for securing supplies of cotton which is the raw material for the manufacture of the yarn the assessee's business being the manufacture of yarn. The assessee was not carrying on a separate and distinct business of speculating on trading in cotton. The decision of the assessee to cancel these contracts was not with a view to suffer a loss or make profit, but to minimise the loss that it was likely to suffer as the purchase of that variety cotton would not have been of utility to the assessee after the assessee had changed the plan of manufacture which required a different variety of cotton. Learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 2 to section 28 of the Act. Counsel for the Revenue invited our attention to the decision of the Supreme Court in the case of CIT v. Shantilal Private Limited [1983] 144 ITR 57, wherein the court dealt with a case of an award made pursuant to a claim for damages on account of breach of contract, and held that such arbitration award does not amount to settlement of contract for the purpose of section 43(5) of the Act. That judgment is not of any assistance to the Revenue in this case. Counsel also referred to a decision of the Bombay High Court in the case of CIT v. Kamani Tubes Ltd. [1994] 207 ITR 298, wherein the court observed that in deciding the character of the transactions, what is important to consider is the distinctive character of such transactions. In each case it is the total effect of all the relevant facts and circumstances that determines the character of the transaction. We are entirely in agreement with that view. 11. Even Hon'ble Delhi High Court in the case CIT v. Hans Machoo Co. [2001] 247 ITR 79 has taken a similar view interpreting the provisions of section 43(5) read with Explanation (2) to section 28 of the Act as under: T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation. Learned counsel for the assessee, on the other hand, submitted that a finding of fact has been recorded by the Tribunal that damages were paid for breach of contract and there was no settlement of the transaction before the breach. That being the position, it is submitted that the Tribunal was justified in its conclusion. Section 43(5) at the relevant time read: A transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips... to be a speculative transaction. A transaction cannot be described as a speculative transaction within the meaning of section 43(5) of the Act where there is a breach of contract and on a dispute between the parties damages are awarded as compensation, e.g., by an arbitration award. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. Section 43(5), however, speaks of a settlement of the contract and a contract is settled when it is either performed or the promisee dispenses with or remits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would be a contract determined or concluded or disposed of . By use of the expression settled , what is intended to be dealt with is a case of performance of contract and not non-performance. In the case at hand the Tribunal has recorded a finding that there was breach of contract and, therefore, damages had to be paid. When a contract is broken there can be no cause of action founded on the contract itself which can be said to be capable of settlement. The above being the factual position, the Tribunal was justified in its conclusions. Accordingly, the question referred is answered in the affirmative, in favour of the assessee and against the Revenue.' 12. In view of the above facts and legal aspect of the provision of section 43(5) of the act examined by Hon'ble High Courts (cited supra), the amounts in question represents damages for breach of contract which does not fall within the purview of section 43(5) of the Act and the said 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s appeal is dismissed. 15. The next issue in this appeal of assessee is against the directions of DRP, which was followed by the AO while framing assessment, for not allowing the claim of discount allowed to customer on account of price difference due to delayed supply to the parties specified u/s. 40A(2)(b) of the Act. For this assessee has raised following grounds: 2.1 On the facts and in the circumstances of the case and in law, the Ld. DRP/AO erred in disallowing following business claims allowed in the normal course of business to the parties specified u/s 40A(2)(b) of the Act on the allegation that rebate and discounts are excessively allowed to related parties: a. ₹ 1,85,00,000/- discount allowed to customers on account of price difference due to delayed supply after contracted period disallowed. b. ₹ 1,00,00,000/- discount allowed to customers for quality claim on material supplied is allowed. 2.2 The DRP/AO failed to appreciate that discount/rebate/credits are allowed in the normal course of its business hence allowable as business expenditure u/s 37 of the Act and no disallowance is warranted. 2.3 Without prejudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther rebate and discount allowed during the year are much higher as compared to earlier year as rightly pointed out by the AO. We are of the view that in facts of the case the amount of ₹ 15,00,000/- being correction of mistake in the invoice raised does not require any disallowance u/s. 40A(2)(b) of the Act. However, we confirm the other disallowance made by the AO for the reasons mentioned in preceding paragraph. Hence, we direct the AO accordingly. Aggrieved, now assessee is in appeal before us. 17. We have heard rival submissions and gone through facts and circumstances of the case. The first and foremost argument of assessee is that Swastk Refinery Pvt. Ltd. as well as Sree Vegetable Oil (P) Ltd. do not come within the purview of section 40A(2)(b) of the Act. According to assessee, Swastik Refinery Pvt. Ltd. holds only 1.25% of the equity shares of the assessee company and hence, there is no substantial interest in the assessee company. Reverse also the assessee company does not hold any equity share in Swastik Refinery Pvt. Ltd. According to assessee, Mr. Om Prakash Agarwal was the common director in the Swastik Refinery Pvt. Ltd. and the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance was not subject matter of the See. 43B of the Act, rather it is an issue related to Sec. 36(i)(va) of the Act . 19. We have heard rival submissions and gone through facts and circumstances of the case. We find that in the order of DRP facts noted are that during the year, there was delay in depositing employees' contribution towards Provident Fund of ₹ 1,11,211/- (August 2008, January 2009 and February 2009) and towards ESI of ₹ 39,166/- (October 2008 to February 2009). These contributions had been delayed deposited ranging from 1 day to 10 days but have been deposited before the due date of filing return of income. We find that the P ESI contributions were paid within the due date of filing of return of income. As the payments are made within the due date of filing of return as prescribed u/s. 139(1) of the Act, the issue is squarely covered in favour of the assessee and against the revenue by the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. M/s. Vijay Shree Limited vide ITAT No. 245 of 2011 in GA No.2607 of 2011 dated 7 th September, 2011, wherein it hasbeen held as under: After hearing Mr. Sinha, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an uncontrolled transaction shall be judged with reference to the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions, thereby unequivocally stating that the conduct of the parties has to be taken into account which is the meaning of the term implicit used therein. 6. In the facts and circumstances of the case, Ld. D.R.P. erred in directing not to make disallowance regarding the proposed disallowance by ignoring the fact that the assessee failed to establish that there is breach of contract and there is no arbitration award. 7. In the facts and circumstances of the case, Ld. D.R.P. erred in directing not to make disallowance of proposed disallowance by ignoring the fact that the fund received from slump sale of assets can be utilized for repayment of loan which bears relatively high rate of interest. 22. Briefly stated facts are that the AO vide draft assessment order u/s. 143(3) r.w.s. 144C of the Act dated 31.03.2013 made adjustment to assessee's arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions Value of Transactions Difference Amount (in Rs.) Crude Palm Oil Difference 1 20,91,96,339 41,48,654 No Difference 6 50,63,32,477 - Total 7 71,55,28,816 41,48,654 RBD Palm Olein Difference 6 58,60,84,027 15,80,76,860 No Difference 4 32,77,82,846 - Total 10 91,38,66,873 15,80,76,860 The assessee contended that the TPO accepted the CUP method to determine ALP on the basis of MPOB rates as per TP Report but the major difference is on account of TPO adopting the rates of MPOB prevalent as on the date of invoice raised by the AE whereas the transactions are carried out and invoiced at the rates prevalent on the date of contract. 23. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. The goods were supplied at contracted price, on which there is no dispute. Invoices were raised on the basis of agreed terms including price as per the contract executed on the basis of standard terms of FOSFA. It is also accepted fact that the prices fluctuate between contract date and invoice date. It is a general trade practice that contract price and contract governs the transactions instead of market price on the date of invoice. During the course of hearing the assessee also submitted a chart showing some instances where prices as on date of invoices were higher as compared to prices as on date of contract and the material was delivered at contracted price i.e. at lower price. Hence, the invoice prices on the basis of contracts are more acceptable than prices as on date of invoice adopted by TPO. Therefore, the adjustment made by TPO is not sustainable and is accordingly rejected. Objection Nos. 1.2.1, 1.2.3 and 1.2.4 are already rectified by the TPO vide Order u/s. 154 of the Act dt. 27.09.2013. Hence the same does not require any adjudication. Since the Transfer Pricing Adjustment done in the draft asst. order is rejected by us, the Objection Nos. 1.2.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general trade practice that contract prices and contract governs the transactions instead of market price on the date of invoice. We find that the assessee has also paid contract cancellation charges calculated on the basis of rate difference between rates prevailing at the time of entering into contract and rates on the date of cancellation of the contract. (iii) The assessee has also filed the details of one of the contracts of the assessee carried out with non AES (giant international commodity traders), which is as under: Sl. No. Party Name Commod Contract Details Invoice Details Actual Rate on Invoice Date 1. Wilmar Trading Pte Ltd. Singapore Crude Palm Oil Date: 06.03.2008 Rate: $1316.50/MT Qty:2000MT(+/-2%) PB Page No.657 Date: 23.6.2008 Rate: 1316.50/MT Qty:2040MT PB Page No.656 MR 3555.50 (page 505) Con ($) 3.2531 (Page 535) Eqv. $ 1092.95 plus $ 20 for FOB charge, $40 freight $ 11.53 Insurance total $1164.48 (iv) Trades transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce declared by the assessee with the Customs tariff rate at Kandla Port as it is stood on the day of contract of sale entered into between the assessee and its AE. The TPO has not adopted this reasonable method. On the other hand, the TPO is going for Customs tariff rate relevant for a subsequent date. This method is not a proper one. 9. There is no material on record 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 day. It means that a price reflected in the sale contract entered into between the assessee and its AE is very much comparable to the market rate prevailed on that day. Therefore, compared to the illogical comparison made by the TPO, the price fixed by the parties on the basis of sale contract is more authentic and acceptable. The difference between the assessee's invoice rate and the average Customs rate at Kandla Port is nominal. The difference goes beyond the permissible 5% range only when the TPO has adopted the average of the tariff prices at Kandla Port. In these types of bulk purchases and sales, it is always better to compare the price of individual consign ..... X X X X Extracts X X X X X X X X Extracts X X X X
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