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TMI Blog2016 (1) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee for deduction under section 10A in the light of evidences as may be filed by the assessee. In view of the above findings of the ld. PCIT, the assessee is required to file the evidences to claim deduction under section 10A of the Act before Assessing Officer for verification and to decide the issue in accordance with law. - Decided in favour of assessee for statistical purposes. Addition under the head of "exchange fluctuations (net)" with respect to forward exchange contracts - Held that:- The assessee is engaged in typesetting services for Scientific, Technical and Medical (STM Publishers) who has entered into forex forward contracts through its bankers with a view to effectively hedge its foreign currency risk. Therefore, these forex forward contracts have a close proximity or rather incidental to the export business of the assessee, which cannot be considered as speculative. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to section 43(5)(a) of the Act, such transaction shall not be deemed to be speculative transaction. Further, the currency cannot be treated as stock or shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishers) and filed its return of income declaring total income of ₹ 26,29,55,199/-. The case of the assessee was processed under section 143(1) of the Act and subsequently, the case was taken up for scrutiny and notice under section 143(2) of the Act was issued to the assessee. Further, the notice under section 142(1) of the Act was also issued to the assessee. Further, the case of the assessee was referred to the Transfer Pricing Officer under section 92CA of the Act for computation of Arms Length price in relation to international transactions as there were international transactions to the tune of more than 50 crores. The ld. JCIT, TPO has passed order under section 92CA(3) of the Act, wherein no adjustments were suggested and the same was brought to the notice of the assessee. The Assessing Officer has observed that the assessee company has four units at different places. The first unit is in the tax holiday period and therefore the assessee has not claimed 10B deduction. The second unit obtained the Registration as 100% EOU in the year ₹ 13.04.1999, i.e., assessment year 2000-01 and commenced manufacturing operations in the same year and the assessment year 2009- 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has submitted that the assessee derives its income from export of software and received income in convertible foreign exchange and therefore, eligible for deduction under section 10A of the Act. The ld. PCIT was of the opinion that there is merit in the submissions of the assessee that in the event of rejection of its claim for deduction under section 10B of the Act, it shall be covered under section 10A, since it is an undertaking deriving profits from export of computer software and accordingly, directed the Assessing Officer to consider the alternate claim of the assessee for deduction under section 10A of the Act in the light of the evidence filed. 5. On being aggrieved, the assessee is in appeal before the Tribunal and the ld. Counsel for the assessee has submitted that with regard to the claim of deduction under section 10B of the Act, the approvals given by different authorities were available and the claim of the assessee has to be sustained. 6. On the other hand, the ld. DR strongly supported the order passed by the ld. PCIT. 7. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The ld. PCIT has obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware and received income in convertibles foreign exchange, the assessee is eligible to claim deduction under section 10A of the Act. The ld. PCIT has accepted the claim of the assessee and directed the Assessing Officer to consider the claim of the assessee for deduction under section 10A in the light of evidences as may be filed by the assessee. In view of the above findings of the ld. PCIT, the assessee is required to file the evidences to claim deduction under section 10A of the Act before Assessing Officer for verification and to decide the issue in accordance with law. Accordingly, the ground raised by the assessee is allowed for statistical purposes. 10. The next issue relates to debiting ₹ 2,40,29,650/- under the head of exchange fluctuations (net) with respect to forward exchange contracts, the ld. PCIT has observed that the assessee has entered into forward exchange contracts in Euro, USD and Great Britain Pound and suffered such loss. He further observed that the business of the assessee does not have a direct nexus with the goods manufactured/sold, the loss has to be treated as speculative loss. With regard to the above, the AR of the assessee has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign exchange forward contracts is whether a speculative loss or business loss, it is an undisputed fact that the assessee company has entered into forward exchange contracts in Euro, USD and Great Britain Pound and suffered such loss. The assessee is primarily engaged in the business of providing typesetting and prepress services and solution provider for the publishing industry. The assessee company invoices its customers in foreign currency and in order to hedge against any risk of loss on currency fluctuations it enters into forward contracts with the authorized dealer bank and therefore, it was the submissions of the assessee that the loss/gains from foreign exchange forward contracts, such loss/gain should be treated as loss/gain from business only. However, the ld. PCIT has held that since the assessee has not satisfied the condition laid down in the provisos (a) and (d) to section 43(5) of the Act, the transactions were not carried out through recognized stock exchange but through dealer banks, the forward contracts were speculative in nature and has to be computed separately in view of explanation 2 to section 28 and also in accordance with section 73 of the Act. 14. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices Ltd Vs. ACIT in 121 ITD 498(Kol.)(SB) has held that foreign currency is neither commodity nor shares as defined under section 43(5) of the Act. (vii) Section 73(1) of the Act restricts the set off of speculation loss against the other business income in only those cases were speculative transactions carried on by the assessee are of such nature so as to constitute a business by itself. It is pertinent to mention here that RBI does not permit any bank under its umbrella to entertain its client in any separate business of forex derivative transactions. Permission is granted only for the clients of the bank to hedge on foreign exchange in order to minimize the risk of the foreign currency exposure arising out of import and export trade. 15. Further, it is a fact that the foreign currency is neither commodity nor stock or shares. Foreign currency is nothing but currency printed in a different country. It is money of a country other than one's own. Currency is a generally accepted form of money including coins and paper notes which is issued by a government and circulated within an economy. It is a medium based on the value of an underlying commodity. It is used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 238 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified 39 by the Central Government for this purpose;] 16. It is pertinent to note that banks have option to trade in foreign currency either through recognized stock exchange or through RBI. When the banks facilitates its cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange contracts, if any loss occurred then such loss was a loss referable to and related to the business carried on and arising out of the business of the assessee. Here there is no finding that entering into foreign exchange contract was the nature of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contract as such. Here in this case, the contract was for a full amount and what the assessee paid in fulfillment of the obligation which was an implied term at the time of entering into the contract did not amount to breach of contract. The breach of contract did not come within the meaning of 'contract settled' as used in Expln.2 of s.24(1) of IT Act, 1922, 'contract settled' meant contract settled before breach. Where the money which the assessee paid was in settlement of the amount of damages suffered by the assessee by reason of breach of the contract to delivery, it is to be held that the payment was not a loss from a speculative transaction as defined in Expln.2 of s.24(1) of IT Act, 1922. (b) In the case of CIT Vs. Badridas Gauridu (P) Ltd., reported in (2003) 261 ITR (Bom) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n excess of export turnover, then that loss suffered in respect of that portion of excess transactions to be considered as speculative loss only as that excess derivate transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. This ground is allowed as indicated above. (f) in the case of VST Industries Ltd. v. Addl.CIT in I.T.A. No. 647/Hyd/2012 vide order dated 23.08.2013 [wherein the ld. Ld. A.M. is co-author], the Hyderabad Bench of the Tribunal, by following the coordinate Bench decision in the case of Leo Edibles Fats Ltd. v. DCIT in I.T.A. no. 396/Hyd/2012 dated 31.05.2013 as well as by following the decision in the case of Friends and Friends Shipping Pvt. Ltd. in T.C.A. No. 251 of 2010 dated 23.08.2011 held that the loss/ expenditure claimed by the assessee on account of fluctuation in the rate of foreign exchange cannot be considered to be notional by following the Instruction No. 3 of 2010 of CBDT. The decision in the case of Woodward Governor India P. Ltd. 312 ITR 254 (SC) and DCIT v. Bank of Bahrain and Kuwait (41 SOT 290 (Mum S.B.) also support such a view. Therefore, considering the case of the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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