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TMI Blog2017 (11) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... In the decision relied by the assessee in the case of London Star Diamond company Ltd. (2013 (11) TMI 424 - ITAT MUMBAI), the Coordinate Bench held that hedging need not be 1 : 1 basis. The coordinate bench of ITAT, Visakhapatnam in the case of Assistant Commissioner of Income-tax, Circle-1, Rajahmundry .v.Sri Ramalingeswara Rice & Oil Mill [2016 (10) TMI 924 - ITAT VISAKHAPATNAM] held that held that no disallowance of loss under forward contract just because assessee had Nil export turnover due to ban on export. In the instant case the assesshad made export turnover of ₹ 40.00 crores and the AO had not made out a case that the total turnover from the derivative transactions was more than the export turnover. Therefore, we hold that the assessee’s case is squarely covered by the case laws relied upon by the assessee and the decision of the London Star Diamond Co. Ltd. (supra) and the decision of this tribunal cited. Hence, the transactions entered by the assessee cannot be held as speculation loss and required to be allowed as business loss. Accordingly, we uphold the order of the Ld.CIT(A) on this issue and allow the appeal of the assessee. Year of allowability - cryta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s effectively claimed the net loss of ₹ 10,34,23,949/- from foreign exchange derivatives. The assessing officer has called for the details, but the assessee failed to furnish the details. Subsequently, the assessing officer called for information from the bank and obtained details for options and derivatives entered into by the assessee with ICICI Bank Ltd. The assessing officer found that the assessee has entered into contracts in respect of foreign exchange derivatives with ICICI Bank Ltd. quoting certain spot rate on a future date and cancelled the contract either before the fixed date or on the fixed date without taking possession of such foreign exchange (US dollars). Consequent on such cancellation the amount receivable /payable in Indian currency resulted in gain of ₹ 1,92,55,655/- and loss of ₹ 12,26,79,604/- resulting in net loss of ₹ 10,34,23,949/-. It was also observed by the assessing officer that in respect of the derivative transactions executed under ISDA Master Agreement with ICICI Bank, the bank has filed OA No. 391/2009 against the Company before the Debts Recovery Tribunal - III at Mumbai and the company has field OS No. 340 of 2008 before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of Foreign Exchange fluctuations, the assessee had entered into Forward Contracts (F.C) in the value of foreign currency. Therefore, Ld.CIT(A) allowed the expenditure as business expenditure u/s 37(1) of the I.T.Act and allowed the appeal of the assessee. While allowing the appeal of the assessee, Ld.CIT(A) also restricted the amount of loss claimed by assessee to ₹ 9,10,00,000/- instead of ₹ 10,24,23,949/- since the assessing officer has added the amount of ₹ 1,35,26,139/- twice. 4.1. The Ld.CIT(A) further held that by the letter of ICICI Bank dated 30/12/2009 the loss of ₹ 9,10,00,000/- was settled as against the original claim of ₹ 18,53,21,184/- by the bank, thus the loss was crysatlised in the F.Y.2009-10 relevant to the A.Y.2010-11 and therefore allowable in the year under consideration. Against the order of the Ld.CIT(A), the department is in appeal before the Tribunal. 5. Appearing for the department, the Ld.DR argued that the assessee is an exporter of granite blocks and trading in foreign exchange derivatives hedging cross currency transactions. The assessee was involved in frequent purchases and sale without taking delivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, Hyderabad. The submissions were made in O.S.340 only to save the company from the Debts Recovery Tribunal. Ultimately, both the parties have reached, out of Court settlement on agreement between the assessee and the banker and there was no judgement delivered by the City Civil Court on the petition made by the assessee. Therefore, Ld.AR argued that averments made in O.A.No.340/2008 should not go against the assessee and the case be decided on facts.The Ld.AR further argued that the assessee is a granite exporter exporting the granite blocks to European countries, China and USA. The export turnover per annum is approximately 40.00 crores, i.e. 88% of the Company s revenue generated from the exports. Due to fluctuating exchange rate of USD during the year 2007, to insulate the revenue earnings, the assessee has entered into derivative transactions with cross currency hedging against USD vis- -vis CHF. The decision of derivative transactions is purely business interest to mitigate the possible loss of revenue due to forex fluctuations. Since the CHF has had a history of stability against USD, on the advice of ICICI Bank Ltd. the company had entered into 12 derivative transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perused the material placed on record. The assessee is an exporter of granite blocks to China, European Countries and USA and the approximate turnover of the assessee was 51 crores out of which 40.00 crores was export turnover which constitute 88% of total turnover. During the year 2008-09, the assessee had entered into derivative transactions by hedging cross currency and incurred the loss of ₹ 12,26,79,604/- and the profit of ₹ 1,92,55,655/-. In fact as per the master agreement the amount due and payable by the assessee inclusive of interest as on 30.12.2009 was ₹ 18,53,21,184/- including the principal amount of ₹ 14,72,91,184/-. The Bank has filed in OA No.391/2009 against the company before Debts Recovery Tribunal and the company has filed a suit in O.S.No.310/2008 before the II Additional Judge, City Civil Court, Hyderabad. However, finally, the assessee company and the bank have agreed for full and final settlement of ₹ 9,10,00,000/- with respect to all transactions. The assessee has submitted that the cross currency hedging is entered into with ICICI Bank, ISDA master agreement to insulate its revenue against wide fluctuations in the exchange ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed supra. [para 18-26). 18. The provisions of section 43(5) provides for definition of speculation transactions‟. The said provisions read as under: ―43. (1)... (2).... (3)... (4).... (5) speculative transaction means 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: Provided that for the purposes of this clause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43 of the Act. Having held so, we shall now examine if the impugned contracts/transactions constitute hedging transactions and covered by the exclusion provisions of clause (a) to the proviso to section 43(5) of the Act. The clause (a) of the proviso to section 43(5) provides for exclusion of the ‗hedging transaction' from the definition of the ‗speculation transactions'. There are number of judgments in support of the assessee and relevant ‗ratios' or conclusions are discussed in the succeeding paragraphs. 20. Before taking up these discussions, we shall now take up the provisions of the Explanation to section 28 of the Act, which also provide definition of Speculative Business . The said explanation reads as under: Explanation 2.--Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as ―speculation business‖) shall be deemed to be distinct and separate from any other business 21. Explanation to section 28 uses the expression ‗speculative transactions carried on by an assessee are of such a nature as to constitute a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, Ld Counsel's comments on CIT(A) conclusions on treating or equating the FCs as ‗derivatives' of currency is also allowed considering the specific definition provided to derivatives in section 2(ac) of Securities Contract Regulation Act, 1956 and it is not the requirement of the law that the 1:1 correlation between the FCs and the export invoices should exist and should be established by the assessee. So long as the total value of the FCs does not exceed, the claim of the assessee is sustainable as business loss. We have also analyzed the decisions relied on by Ld DR and find they are distinguishable. Now, we shall proceed to import some conclusions of the said decisions. Relevant judgmental laws - Conclusions Held portions 23. Relevant extracts from the cited judgments are inserted in the succeeding paragraphs here as under: A. Held portion in the case of D. Kishorekumar 2 SOT 769 (Mum) The details of forward exchange contract clearly show that all the forward exchange contracts were in respect of each specific import order placed by the assessee. The purpose of these transactions was clearly to minimise assessee‟s risk on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to actually meet the foreign exchange requirements at the time of paying the import bills....... The due dates of payment at that point of time were only 16 days to 77 days away. The decision as to whether further hedging against the increase in foreign currency is warranted or not is essentially a commercial decision which depends on a number of factors, most important factor being the trend of currency markets at that point of time and businessman‟s perception about future trends of the currency market. For example, when a businessman perceives that the market value of foreign currency vis-a-vis the domestic currency will not go any higher or when the market starts the declining trend, he may see business expediency in cancellation of contract. The fact of premature cancellation, therefore, cannot alter the nature of transaction. For all these reasons, the credit shown in the P L a/c as 'profit on cancellation of forward contracts' is as integral part of the export business, as purchases or imports..... The assessee succeeds on this issue. In the result, the appeal is allowed. 24. Although, the said decision was pronounced in the context of section 80HC of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on of business certain loss or obligation or interest arise these must be deferrable to the carrying on the business and these must be incidental to the carrying on of the business. Undoubtedly, the contract for foreign exchange as such can be treated as a contract for commodity............. The Conclusion of this judgment as reported reads as under: Where in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. 26. The above extracts unanimously support that the FCs entered by the assessee, an exporter and not the dealer in foreign exchange, with the Banks as incidental to the export business, are business transactions and loss or gains is not of speculation nature. 8.1. The Coordinate Bench, Visakhapatnam in the case of Assistant Commissioner of Income-tax, Circle-1, Rajahmundry .v.Sri Ramalingeswara Rice Oil Mill* on similar facts in 2017] 78 taxmann.com 17 (Visakhapatnam - Trib.) held that 12. Before we, go in to the facts of the present case, let us understand, forward contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign currency, then such transactions are kept outside the purview of the definition of speculative transactions. Therefore, to see whether a particular transaction is a speculative transaction or a mere hedging transaction, there should be export or import of goods or merchandise at least to the extent of value of forward exchange contracts. 14. The treatment to be given to foreign currency items as per the amended AS - 11 of ICAI, notified by Central Government u/s. 211(3C) of Companies Act, does not make any distinction between items of capital nature and revenue nature. Both are required to be recognized in the Profit Loss Account. In view of the aforesaid amendment, there exists a divergence of views on the treatment to be meted out in the books of account and in the Indian Tax Laws. Further, with an increased flow of inbound/outbound transactions and their complex dynamic structuring, the tax treatment of foreign exchange gains/losses has been surrounded by huge litigation and various Courts have discussed the same in great detail. Exchange Fluctuation Difference and tax treatment of the captioned issue was discussed in great detail in the recent landmark ruling of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and whether in fact it has resulted in profit or loss to the assessee. Therefore, once loss incurred on account of fluctuation in foreign currency, then the loss suffered shall be allowed as business loss, unless it is in the nature of speculation loss. 16. Having said that, let us come to the facts of the present case. In the present case on hand, the assessee is into the business of export of rice and other commodities. During the previous financial year, it has achieved export turnover of about ₹ 80 crores. The forward exchange contracts are entered in the previous financial year, which was not disputed by the A.O. Though there is no export turnover for the current financial year, this is because of a ban imposed by the Government of India, on export of rice and other commodities. As rightly pointed out by the Ld. A.R. for the assessee, the Government of India imposed ban on export of rice for a temporary period. Although the ban was extended for a further period i.e. up to end of financial year 2008-09, the assessee was on the bona fide belief that the ban on export is temporary and Government may review the ban, therefore, it can continue its exports and accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e do not see any reasons to interfere with the order of CIT (A). Hence, we inclined to uphold the CIT (A) order and reject the ground raised by the reven 8.2. In the assesse s case, the assessee is an exporter of granite and because of the assessee s business of export of granite, the assessee could enter into contract with the ICICI Bank for hedging the cross currency transactions to insulate the revenue and to mitigate the loss. The Reserve Bank of India vide circular 22/2007-08 dated 02.07.2007 permitted a person, resident of India to enter into foreign contract with an authorized dealer to hedge an export to exchange risk in respect of transactions for which sale and purchase of foreign exchange is permitted under the Act. It means, authorized dealer can hedge the business receivables so as to enable the parties to avoid exchange value differences. The authorized dealer i.e. bank can do this only for hedging not for speculation. The Reserve Bank of India in July 2006 had issued a master circular consolidating all notifications, guidelines and circulars on the forward and derivative contracts in foreign exchange. To summarise the derivatives and option contracts are permitt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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