9911796707
TMI Blog2018 (4) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation in the Finance Act, 2012 with retrospective effect from 01/04/2012. There is no dispute that the corporate guarantee is an international transaction and different assessees are adopting different methods of treatment. Some assessees charges nominal rate to the AEs, whereas other assessees are treating this as shareholder service. Here, the assessee has objected to include this transaction as international transaction for the reason that the Finance Act, 2012, which has inserted an explanation, which will be applicable prospectively from AY 2013-14 and the corporate guarantee transaction will not be applicable to the current AY. Thus we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect Unrealised gains on foreign exchange forward contracts - Held that:- Real gain/loss is only when the contracts are concluded. Therefore, recognition of this notional gain or loss depends upon accounting policies or method of accounting regularly followed by the assessee, since the assessee is following mercantile system of accounting, recognition of gain/loss are traceable over the years. Since, al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion u/s 10A. 3.1 When the assessee objected the same before the DRP, the DRP directed the AO to reduce telecommunication charges not only from export turnover but also from the total turnover for the purpose of computing deduction u/s 10A. 4. Aggrieved by the order of DRP, the revenue is in appeal before us. 5. Considered the rival submissions and perused the material facts on record. The Hon'ble Courts and the coordinate benches of ITAT have consistently held that the internet charges have to be excluded both from the export turnover as well as from the total turnover while computing deduction u/s 10A of the Act. The Hon'ble Bombay High Court in case of CIT v. Gem Plus Jewellery India Ltd. 330 ITR 175 as well as different Benches of Tribunal including ITAT, Chennai Bench (SB) in the case of ITO v. Sak Soft Ltd. (313 ITR (AT) 853) have held that communication charges attributable directly to the export of article or thing outside India has to be excluded both from export turnover as well as total turnover while computing exemption u/s 10A of the Act. In view of the above, we are in agreement with the order of DRP and direct the AO to exclude the communication charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction and proposed to determine its arm's length price at ₹ 23,31,552/- worked out @ 2% as commission on the outstanding balance of the loan as on 1.4.2009 of ₹ 11,65,77,600/-. 9.1 Before the DRP, the assessee submitted the ITAT in case of Glenmark Pharmaceutical case upheld the guarantee commission rate @ 0.53%. He, therefore, submitted that since the rate adopted by the TPO @ 2% is too high, the rate may be reduced suitably. 9.2 The DRP, however, confirmed the action of the TPO. 9.3 Considered the rival submissions and perused the material facts on record. Assessee has provided corporate guarantee to its AE in the current AY without charging any fees for the same. The term 'guarantee' was inserted in the definition of international transaction by inserting an explanation in the Finance Act, 2012 with retrospective effect from 01/04/2012. There is no dispute that the corporate guarantee is an international transaction and different assessees are adopting different methods of treatment. Some assessees charges nominal rate to the AEs, whereas other assessees are treating this as shareholder service. Here, the assessee has objected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and consequently, ALP adjustment is not warranted on this aspect. Accordingly, the ground raised by assessee is allowed. 10. As regards ground no. 3 regarding unrealized gain on foreign exchange forward contracts of ₹ 9,04,81,526/-, the assessee deducted this amount in the computation of income. However, the AO added back the said amount to the income of the assessee on the ground that there was no reason to deduct the same in computation. 10.1 Before the DRP, the assessee argued that this gain represents unrealized gain and that it was arrived at only by making the contract to market and it is being a notional gain, the same was reduced from the computation of income, though, it was taken into accounts in the books and credited to the profit and loss account. 10.2 The DRP, however, upheld the action of the AO. 10.3 The ld. AR filed written submissions, wherein the following submissions were made: Ground 3: Unrealised gains on foreign exchange forward contracts 16. This ground deals with the denial of the deduction by the Assessing Officer for the amount of ₹ 9,04,81,526/- being the unrealized gain on foreign exchange forward contracts which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s objection is rejected 20. It is submitted that there is a fallacy in the above decision of the Hon'ble DRP. The DRP having directed to allow loss on revaluation in A.Y.2010-11 which was not claimed in earlier year, by following the method of computing taxable income as per rule of consistency, the DRP ought to have directed to exclude profit/gain on foreign exchange transactions which were valued on 'mark to market' basis. Notional losses as well as gains should not be taken into account while computing taxable income 21. In the case of CIT v. Indian Overseas Bank [1985] 151 ITR 446 (Mad.), the Hon'ble Madras High Court held that the unrealized losses on outstanding foreign exchange contracts are not allowable. Similarly, it held that unrealized gains on such outstanding contracts are not taxable. In this case the unrealized loss on outstanding contracts was held allowable by the Tribunal but the Hon'ble Madras High Court did not agree with the Tribunal. It observed as under: The levy of income tax is on income and though the income tax Act has taken note of the twin points of time at which the liability to tax is attracted viz; the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not before and so long as that stage has not been reached the loss can only be notional and not actual or real and notional loss cannot be claimed as a deduction. Whether a loss or profit, the principle applicable would be the same and the estimated profit, till the settlement of the forward foreign exchange contracts, could be regarded only as notional and not actual or real and such notional profits cannot be assessed (Emphasis supplied) 23. It may kindly be observed that the Madras High Court has clearly held notional profit on outstanding contracts cannot be brought to tax. Till contracts are settled, there is no taxable gain nor allowable loss. 24. A similar view was taken by the CSOT in instruction No. 03/2010 dated 23/03/2010. In this instruction, the CSOT considered the issue of allowability of losses consequent to marking the foreign exchange forward contracts to market and it has observed as under: A 'Marked to Market' loss may be given different accounting treatment by different assesses. Some may reflect such loss as a balance sheet item without making any corresponding adjustment in the Profit and Loss Account Other may book the loss in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period [Para 18]. Gains on Mark to market transactions are required to be ignored under well recognized concept of prudence II / convention of conservatism of followed in mercantile system of accounting 28. Even if unrealized losses on outstanding foreign exchange contracts are allowable as deduction in view of the Apex court decision in the case of Woodward Governor India (P.)Ltd. (supra), it does not follow that unrealized gains on outstanding contracts are necessarily to be taxed. 29. Even under the mercantile system of accounting, unrealized losses and unrealized gains on outstanding foreign exchange forward contracts do not stand on the same footing. They have to be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the apex court has held that a method of accounting followed by the assessee continuously for a given period of time has to be presumed to be correct till AO comes to a conclusion for reasons to be given that the said system doesn't reflect true and correct profits. It has observed in para 10 of its order as under: '10. As stated above, on facts in the case of M/s Woodward Governor India (P.) Ltd the Department has disallowed the deduction/debit to the P L account made by the assessee in the sum of ₹ 29,49,088/- being unrealized loss due to foreign exchange fluctuation. At the very outset it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased resulting in loss that the Department has disallowed the deduction/debit This fact is important It indicates the double standards adopted by the Department' (Emphasis supplied) While determining taxable income 'Rule of consistency' should prevail over other factors. 31. Even before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied) 34. In the case of CIT v. Margadarsi Chit Fund Private Limited (155 ITR 442), it has been held that before rejecting the system of accounting consistently followed by the assessee by several years and accepted by Department in the past, it must refer to inherent defects in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from books of account maintained by the assessee. 35. In the case of CIT v. Bilahari Investment (P.) Ltd (299 ITR 0001), it was held as per the head note, as under: Every assessee is entitled to arrange its affairs and follow the method of account which the Department has earlier accepted It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method : 36. The Appellant has been quite fair to the revenue by not claiming deduction for MTM losses and offering to tax MTM gains. It is submitted that the approach adopted by the Department to compute taxable income by ignoring MTM losses but to subject MTM gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid that he acquired a right to receive the income or that income has accrued to him. 41. As per the above decision of Supreme Court, only the accrued gains can be bought to tax. In this case, the assessee was awarded compensation for the land acquired from him by the government by the arbitrator but the government went in appeal against the award. As the matter was pending before the court, the Supreme Court held that the party could not be taxed on the amount awarded to it. In other words, even after the award of the arbitrator, it was held that the gains did not accrue as the matter was in dispute before the court. 42. Similarly, in the present case the maturity period of the contract is not over and the loss/gain is not actually ascertained. Whether a contract in question would yield profit or loss and quantum thereof are matters in the womb of future. So, there is no basis for the making addition of ₹ 9,04,81,526/- which is notional gain arising out of valuation of foreign exchange. Actual value of the gain would arise on maturity of contract. Therefore, notional gain added by the Assessing Officer on revaluation of forex liability may kindly be deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal and not real loss or gain as the forward contracts were not concluded. Real gain/loss is only when the contracts are concluded. Therefore, recognition of this notional gain or loss depends upon accounting policies or method of accounting regularly followed by the assessee, since the assessee is following mercantile system of accounting, recognition of gain/loss are traceable over the years. Since, all the notional gain/loss are regularly declared by the assessee in its financial accounts. Therefore, in our opinion, assessee is consistently following a method of accounting and also discloses foreign currency transactions in its books of account and consistently following the same method of accounting over a period of time. Further, the Instruction No. 03/2010 dated 23/03/2010 issued by CBDT wherein it is clearly observed as under: A 'Marked to Market' loss may be given different accounting treatment by different assesses. Some may reflect such loss as a balance sheet item without making any corresponding adjustment in the Profit and Loss Account Other may book the loss in the Profit and Loss Account which may result in the reduction of book profit In cases where no ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
