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TMI Blog2017 (6) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on export receivables, the assessee cannot be allowed “mark to market” losses on such forward contract and therefore it is not required to examine whether those forward contract transactions were speculative in nature. In view of above we hold that the loss claimed by the assessee on account of mark to market losses on account of fluctuation in foreign currency in respect of hedging forward contract is not allowable. - Decided against assessee. - ITA No. 1224/Del/2017 - - - Dated:- 29-5-2017 - Sh. C.M. Garg, Judicial Member And Sh. O.P. Kant, Accountant Member Appellant by: Sh. S.K. Aggarwal, CA Respondent by: Sh. Ravi Jain, CIT(DR) Sh. S.K. Jain, DR ORDER Per O. P. Kant, A. M. This appeal by the assessee is directed against the order of the Assessing Officer dated 27/01/2017 for assessment year 2009-10. The Income-Tax Appellate Tribunal (in short the Tribunal ) in its order dated 14/10/2015 for the year under consideration, in ITA No. 882 /Del/2014, restored the issue of marked to market (MTM) losses on forward contracts for afresh adjudication to the Ld. Dispute Resolution Panel (in short the DRP ). The Ld. DRP in compliance to the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 3/2010 dated 23 March 2010 issued by the Central Board of Direct Taxes, as this Instruction is issued with respect to assessees trading in forex-derivatives. Also, the Instruction is issued after the year under consideration. Thus, accordingly the same is not applicable to the Appellant. Further, the said Instruction is ultra vires to the scope of section 119 of the Act being prejudicial to the interest of the Appellant. 7. That the Ld. AO has erred in charging interest under sections 234B and 244A of the Act. 8. That on the facts and in circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act. 9. That the appellant reserves its right to alter or amend any ground of appeal or add any further grounds either before or at the time of hearing of this appeal. 2. The facts in brief of the case are that during the relevant period, the assessee company provided Engineering Design Service etc. to its Associated Enterprise (AEs) and raised invoices from time to time. To safeguard any losses in sales invoices raised, on account of exchange fluctuation in foreign currency, the assessee entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-Aug-0S 146169 O3-Jul-09 3,100,000 43.25 134,075,000 51.14 3-Jul-09 158,537,614 (24,462,614) 6-Aug-OS 146171 4-Aug-09 3,100,000 43.33 134,323,000 51.23 4-Aug-09 158,798,696 (24,475,696) 6-Aug-08 146173 4-Sep-09 3,200,000 43.35 138,816,000 51.31 4-Sep-09 164,177,990 (25,361,990) 6-Aug-08 146174 1-Oct-09 3,300,000 43.44 143,352,000 51.38 1-Oct- 09 169,540,704 (26,188,704) 6-Aug-08 146175 4-Nov-09 3,000,000 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not by itself tantamount to business loss deductible for income tax purposes. The provisions of Income-tax Act, 1961 do not allow deduction of any such notional loss for which the liability has not crystallized and, therefore, marked to market (MTM) losses on account of revaluation of forex derivatives are only notional and cannot be deductible as business loss under Income-tax provisions. Moreover, in this case, there was no actual outgo as the assessee was not liable to pay for such losses. Relying on the Central Board of Direct Taxes (CBDT) instruction bearing No. 17/2008 dated 26/11/2008 and 3/2010 dated 23/03/2010, the Assessing Officer disallowed the said loss. 2.3 The Ld. DRP, in first round of proceeding, upheld the finding of the Assessing Officer and also held that the forward contracts were not fully supported by the underlying support invoice both in terms of the amount as well as tenure. The Ld. DRP has drawn a table in the order, which is reproduced as under: DETAIL OF OUTSTANDING FORWARD COVERS AS ON 31ST MARCH, 2009, FOR WHICH INVOICING DONE TILL MARCH, 2009 Contract Contract Da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-Sep-09 146174 6-Aug-08 3,300,000 Beyond 31.3.09 NO 160558 1-Oct.-09 146175 7-Aug-08 3,000,000 Beyond 31.3.09 NO 161236 4-Nov-09 146176 7-Aug-08 3,100,000 Beyond 31.3.09 NO 162068 4-Del-09 Sub-Total 14,871,953 Grand Total 27,600,000 2.4 The Ld. DRP noted that out of nine forward contracts, the assessee has only used 4 (four) forward contracts fully and the assessee had not used those forward contracts immediately but it started using them against the sale invoices after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f relevant proposition and provisions of the Act. Therefore, relying on the said propositions and following the judgement of Hon ble apex court in the case of Woodward Governor (312 ITR 254), we restore this issue to the file of AO/DRP for a fresh adjudication after factual analysis and examination of the impugned transactions after affording due opportunity of hearing for the assessee and without being prejudiced by the earlier orders. 2.7 Pursuant to the order of the Tribunal, the ld. DRP, allowed opportunities to the assessee for filing submissions and calculations in terms of the order of the Tribunal. The Ld. DRP has noted in the order that assessee failed to file the necessary evidence to substantiate its claim. The relevant finding of the Ld. DRP is reproduced as under: 5. As discussed above, the matter was fixed for hearing and the assessee reiterated the submissions made earlier before the Hon ble ITAT. The assessee was given another opportunity to file submissions and calculates in terms of the Hon ble ITAT s order. The submissions of the assessee and the facts have been carefully considered. The assessee has only reiterated the submissions made earlier and has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. counsel of the assessee filed paper book containing pages 1 to 355. The Ld. counsel also filed a chart showing details of forward contracts entered into by the assessee viz-a-viz Forward Inward Remittance Certificates (FIRC), submitted in the paper book, evidencing that all forward contracts were settled with actual delivery. The Ld. Counsel contended that all the necessary information were filed before the ld. DRP , however the ld. DRP did not consider its submission and repeated its finding given in earlier order. The ld. Counsel further reiterated the arguments taken before the lower authorities that it was mandatory for the assessee to measure the MTM losses on the unexpired forward contracts at the end of the year in accordance with the method of accounting consistently followed by it with respect to the effect of changes in foreign exchange rates. 4.2 The Ld. counsel further submitted that MTM losses at year end were ascertained liability. An anticipated liability coupled with present obligation, the quantification of which may vary depending on future events, can be said to have crystallized on the balance sheet date and thus allowable on accrual basis under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 43A of the Act. Since in the above batch of the appeals, the assessment year involved was 1998-99, the Hon ble Supreme Court decided the issue raised in second question of law in view of section 43A (pre-amended w.e.f. 01/04/2003) of the Act and held that it became possible to adjust the increase/decrease in liability relating to acquisition of capital assets on account of exchange rate fluctuation, in the actual cost of the assets acquired in foreign currency and for, inter alia, depreciation to be allowed with reference to such increased/decreased cost. After 1-4-2003, the issue is governed by the amended section 43A of the Act. 4.5.2 As regards the first question of law in the case of Woodward Governor (supra), we find that there was a loan liability in the books of accounts of the assessee on revenue account as a monetary transaction appearing in the balance sheet and was raised in foreign currency. Due to fluctuation in foreign currency exchange as on 31st March of the accounting year, the liability had increased. The assessee debited the increase in liability due to fluctuation as loss in the profit and loss account. The Hon ble Supreme Court held that the loss suffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version of foreign currency which is part of trading asset of the assessee is a trading loss as any other loss. ● In determining the true nature and character of the loss, the cause which occasions the loss is immaterial; what is material is whether the loss has occurred in the course of carrying on the business or is incidental to it. ● If there is loss in a trading asset, it would be a trading loss, whatever be its cause because it would be a loss in the course of carrying on the business. ● Loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not. ● Loss resulting from depreciation of the foreign currency which is utilized or intended to be utilized in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be capital loss. ● For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilization of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had orig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s BECHTEL Capital Management Corporation, which was sold to bank at the rate of ₹ 42.97 per dollar as already contracted. According to the decision in the case of Woodword Governor (supra), the assessee could have re- measured is its receivables on the balance sheet date according to the foreign exchange rate contracted in the forward contracts. For example, the assessee made sales of 632 USD in Oct., 2008 and recorded sales in Indian rupees at ₹ 31,640/- in books of account. According to this exchange rate, on the date of sale was ₹ 50.06. The assessee apprehended decline in foreign exchange rate and already entered into a forward contract with the banks having contracted foreign exchange rate of ₹ 42.97 USD. On the date of balance sheet, the forward contract was not matured. In such circumstances, following the Woodward Governor (supra), the assessee could have valued export receivable of 632 USD at the rate of ₹ 42.97 which would be ₹ 27,157/- and in that case the assessee would have a loss of ₹ 31,640 27,157 = ₹ 4,483/-, on balance-sheet date as per marked to market , which would have been allowed as a loss to the assessee . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to settle the contracts either by the purchasing US dollar from market or paying difference of exchange rate. If the assessee, would have required to buy US dollar for honouring its forward contracts of sale of US dollar, the liability of the assessee would have definitely dependent on the foreign exchange rate on maturity date or balance sheet date. But in the instant case, as the assessee has submitted that it entered into hedging forward contract transactions and settled all the forward contract by way of export receivables, therefore, it was immuned from any such fluctuation in the foreign exchange rate and there was no liability, which could arise on account of such fluctuation in foreign exchange on maturity of contract. In such circumstances, when it is certain that no additional liability would arise to the assessee on the maturity of the contract, the possibility of such liability on the balance sheet date also cannot arise. The only outgo on account of the forward contracts was premium or discount payments to the banks at the inception of forward exchange contracts and there was no outgo on possible fluctuation in the foreign exchange rate, and thus, there was no l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the allowability of the loss on actual payment in A.Y. 2009-10 has been made subject to the allowability of the loss for A.Y. 2008-09. This stand of the DRP itself negates the observations of Assessing Officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee in this year. This ground of the assessee is allowed. 4.7 In our opinion, in the assessment year 2008-09, facts in detail were not brought before the Tribunal, as to whether the foreign-exchange fluctuation liability was in respect of export receivables, which was an item of trading account or in respect of forward contracts, which were not part of trading account of the assessee. 4.8 In view of our discussion above, we are of the opinion that hedging forward contracts of foreign currency cannot be marked to market (MTM) on balance sheet date as already there is a underlying asset and there is no extra outgo for settlement of the forward contract other than already determined in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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