PR COMMISSIONER OF INCOME TAX RAJKOT 1 vs. MGM EXPORTS

C/TAXAP/309/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 309 of 2018 ========================================================== PR COMMISSIONER OF INCOME TAX RAJKOT 1 Versus MGM EXPORTS ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA

Date : 11/04/2018 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. Draft amendment is allowed. 2. Revenue is in appeal against the judgement of the Income Tax Appellate Tribunal dated 28.08.2017 raising following questions for our consideration: “1. Whether the Appellate Tribunal is right in law and on facts in deleting the addition made by the AO on account of treating the loss from speculation business as against claimed by the assessee as hedging loss? 2. Whether the Appellate Tribunal has erred on facts and in law in deleting the addition of Rs. 5,05,330/- made u/s. 40(a) (ia) of the Act without appreciating that the commission paid to a non resident agent was subject to TDS u/s. 195 of the Act?” Page 1 of 6

C/TAXAP/309/2018 ORDER 3. The first issue pertains to the decision of the Tribunal treating the loss suffered by the assessee in connection with the hedging contract as a business loss rejecting the Assessing Officer's contention that the same being speculative in nature was not allowable deduction. 4. From the documents on record we notice that the respondent- assessee is engaged in the business of manufacturing and trading of dress and other materials. The assessee sales such goods through export also. On such export sales, there would be possibility of the foreign remittances being delayed for variety of reasons. The assessee would therefore be exposed to foreign exchange fluctuation risks. To protect itself or at least to minimize the risk, the assessee enters into contract with the bank. The Assessing Officer was of the opinion that such hedging contract was speculative in nature and the expenditure incurred in the process was not allowable deduction. CIT (Appeals) as well as the Tribunal reversed this decision. 5. In somewhat similar situation, this Court in case of Commissioner of Income Tax vs. Friends and Friends Shipping (P) Ltd. reported in 35 taxmann.com 553 had held and observed as under: “6. In the decision of the Bombay High Court, the assessee was in the business of export of cotton. The assessee had entered into forward contract with banks in respect of foreign exchange. Some of these contracts could not be Page 2 of 6

C/TAXAP/309/2018 ORDER honoured for which the assessee had to pay Rs.13.50 lacs which was debited to the profit and loss account. The assessee claimed the sum as business loss. Revenue was of the opinion that the loss was speculative in nature. Bombay High Court following the decision of the Calcutta High Court in the case of Soorajmull Nagarmull (supra) held that the expenditure would not be covered under section 43(5) of the Act as speculative transaction. It was observed as under: “The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee's regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under section 43(5) of the Income-tax Act, “speculative transaction” has been defined to mean a transaction in which a contract for the purchase or sale of commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as state above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some caes failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs.13.50 lakhs as a business loss. This matter is squarely covered by the jdugment of the Calcutta High Court, with which we agree, in thecase of CIT v.Soorajmull Nagurmull(1981) 129 ITR 169.” 7. Before the Calcutta High Court, the assessee was a firm engaged in the business of import and export of jute. In course of business, the assessee would enter into forward contract in foreign exchange in order to cover the loss which may arise due to difference in foreign exchange valuation. In one such contract, the assessee had to pay to the Bank difference of Page 3 of 6

C/TAXAP/309/2018 ORDER Rs.80,491/- which was claimed by the assessee as revenue expenditure. The Assessing Officer disallowed the claim. The High Court held that the assessee was not a dealer in foreign exchange and the foreign exchanges were only incidental to the assessee's regular course of business and the loss was thus not a speculative loss but incidental to the assessee's business and allowable as such. Facts in the present case are very similar. Admittedly, the assessee is not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with the banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the Bank and thereby incurred certain expenses. These expenses the assessee claimed by way of expenditure towards business. We do not find that the transaction can be stated to be in speculation as to cover under sub-section (5) of section 43 of the Act. “ 6. The second issue relates to the addition made by the Assessing Officer of a sum of Rs. 5.05 lacs under section 40(a)(ia) of the Income Tax Act, 1961 on the ground that the assessee had not deducted tax at source on foreign commission payments. The Tribunal however, recorded that the non-resident agent of the assessee was operating at his own level and no part of the income arose or accrued in India. 7. In the recent order in Tax Appeal No. 290 of 2018, we had dealt with similar situation making following observations: “It can thus be seen that while confirming the order of CIT [A], the Tribunal relied on judgment of the Supreme Court in the case of G.E India Technology Centre P. Limited vs. Commissioner of Income-Tax & Anr., reported in [2010] 327 ITR 456 (SC). In such judgment, it was held and observed that Page 4 of 6

C/TAXAP/309/2018 ORDER the most important expression in Section 195 [1] of the Act consists of the words, “chargeable under the provisions of the Act”. It was observed that, “..A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act.” Counsel for the Revenue, however, drew our attention to the Explanation 2 to sub-section [1] of Section 195 of the Act which was inserted by the Finance Act of 2012 with retrospective effect from 1st April 1962. Such explanation reads as under :- Explanation 2 – For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has - [i] a residence or place of business or business connection in India; or [ii] any other presence in any manner whatsoever in India. It is indisputably true that such explanation inserted with retrospective effect provides that obligation to comply with subsection [1] of Section 195 would extend to any person resident or non-resident, whether or not non-resident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a non-resident was taxable under the Act or not. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre P. Limited [Supra], sub-section [1] of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in Page 5 of 6

C/TAXAP/309/2018 ORDER connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India. Tax Appeal is therefore dismissed.” 8. In the result, Tax Appeal is dismissed. (AKIL KURESHI, J) (B.N. KARIA, J) JYOTI V. JANI Page 6 of 6