LOUIS DREYFUS COMMODITIES INDIA PVT. LTD.,GURGAON vs. ACIT, NEW DELHI

आदेश / ORDER आदेश आदेश आदेश PER SUSHMA CHOWLA, JM: The appeal filed by assessee is against order of Assessing Officer dated 22.12.2006 relating to assessment year 2005-06 passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).

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“That on the facts and circumstances of the case, and in law; 1. The Order passed by Ld. CIT(A) in pursuance of the appeal filed by the Appellant against the Assessment Order passed by the Ld. AO is a vitiated order as the Ld. CIT(A) erred both on facts and in law in confirming the addition made by the Ld. AO to the Appellant’s income in respect of washout charges by issuing an order without appreciation of facts and law/ 2. The Ld. CIT(A) erred in confirming the addition of the income of the Appellant by Rs. 16,553,271 by holding that the international transaction of the Appellant pertaining to payment of washout charges does not satisfy the arm’s length principle envisaged under the Act. 2.1. In doing so, the Ld. CIT(A) has grossly erred in agreeing with the Ld. AO/Ld. Transfer Pricing Officer’s (‘Ld. TPO’s) action of drawing perverse interference regarding the arm's length behaviour between the parties notwithstanding supporting evidence placed on record; 2.2. The Ld. CIT(A) has erred in law and on facts by holding that there is no valid agreement at the time of washout of the contract for purchase of balance quantity of crude soyabean oil. 2.3. The Ld. CIT(A) has erred in law and on facts doubting the authenticity and genuineness of the evidences placed by the Appellant in support of the contention that the washout transaction was in respect of the valid unexpired contract; 2.4. The Ld. CIT(A) has erred in law and on facts by not giving cognizance to the fact that impugned transaction of payment of washout charges was independently examined and approved by the regulatory body, Reserve Bank of India (‘RBI’); 2.5. The Ld. CIT(A) has erred in law and on facts by holding that the evidence provided by the Appellant was not reliable and authentic. Page | 2

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consideration had furnished the return of income declaring total income of

Rs.2,35,06,990/-. The assessee was engaged in the business of agricultural

commodity trading. The said commodity trading was done both in the

domestic and international market. The main commodities which were traded

were soyabean oil, sugar, wheat and rice. The Assessing Officer made

reference u/s 92CA(1) of the Act to the Transfer Pricing Officer (in short “TPO”)

to determine the Arms’ length Price (in short “ALP”) of the international

transactions undertaken by the assessee. The TPO applied Comparable

Uncontrolled Price method (“CUP” in short) and proposed an addition of

Rs.9,32,747/- in the transaction of purchase of crude soyabean oil by the

assessee from its AE. The said addition has been deleted and there is no issue

raised with regard to the same before us.

1997 in Mumbai, which were re-located to New Delhi during the year 2000.

The assessee was operating from various locations/ports in India. The TPO

noted that the assessee was engaged in import and export of sugar, export of Page | 3

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wheat, rice, soya and sugar and import of edible oil from its associated

companies. It was also purchasing these items from manufacturers and

exporting to the group companies. Besides this, the assessee was engaged in

various other activities i.e. High Sea Sales, commodity hedging, etc. Another

aspect which was noted by the TPO was that the assessee kept regular track of

demand, supply scenario and environment relating to commodities dealt in.

The TPO analyzed various international transactions undertaken by the

assessee and also transfer pricing approach adopted by the assessee. It

transpired that the assessee on 04.01.2005 had contracted to import from its

AE 10,000 Metric Tons (in short “MT”) of crude soyabean oil @ USD 546 PMT.

The said contract was applicable for shipment during January, 2005.

However, the assessee could import 3,064.618 MT of crude soyabean oil and

the remaining quantity of 6,922 MT was not purchased due to alleged price fall

in India and internationally. The assessee explains that there was a decrease

in international price of crude soyabean oil accordingly, the assessee had

compensated the AE at USD 55 PMT. In the process, the assessee incurred

loss of USD 55 PMT for washout quantity of 6,922 MT. Since the contract rate

was applicable for shipment during the month of January, 2005, and the

contract to import balance shipment was cancelled on 03.02.2005, on the

basis of letter of the assessee dated 02.02.2005; the assessee was asked to

justify the claim of loss, by the TPO. The assessee submitted that there was a

mutual agreement to cancel the balance unshipped quantity on payment of

USD 55 PMT. The plea of the assessee in this regard was that in order to avoid

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the loss which the company would have suffered because of the fall in price of

oil in India, the contract was cancelled. The assessee also explained that infact

if it had purchased the crude soyabean oil in terms of contract entered into

with LD Asia, it would have incurred loss to the extent of USD 75 to 79 PMT.

The claim of the assessee was that it had paid only USD 55 PMT, which was

lower than loss on account of price of crude soyabean oil of USD 75 to 79 PMT.

It was also pointed out that LD Asia on cancellation of contract sold the said

item to a concern in China @ USD 488 PMT, suffering loss even after the

compensation received on cancellation of contract by the assessee company.

The assessee thus, claimed that the loss arising on the payment of

compensation should be allowed as a deduction in the hands of the assessee.

The TPO was of the view that the contract price of USD 456 PMT was

applicable for purchase made in the month of January, 2005 only. As the

contract was not extended further, then there was no question of cancellation

of contract for the balance amount on 02.02.2005. He was of the view that it

was a case of cancellation of an expired contract. The TPO held that since on

the date i.e. 03.02.2005, the contract had already expired and the assessee had

not purchased the balance amount of crude soyabean oil, no liability accrued

to the assessee to make payment of differential amount on the basis of expired

contract. The evidences filed by the assessee in respect of the transaction

undertaken by LD Asia, after the cancellation of contract, to establish that the

said concern had also incurred loss, was not accepted by the TPO.

Consequently, the income of the assessee was proposed to be enhanced by

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Rs.1,74,86,018/-. The Assessing Officer issued the assessment order making

the aforesaid addition vide order dated 22.12.2006.

no appeal has been filed by the Revenue.

the assessee as deductible, the CIT(A) noted that the assessee had entered into

contract dated 04.01.2005 for the purchase of 10,000 MT of crude soyabean

oil @ USD 546 PMT (CIF), with its AE i.e. LD Asia. Only 3,078 MT of crude

soyabean oil was shipped in January, 2005 and the balance was mutually

agreed to be shipped next month i.e. in February, 2005. The assessee claimed

that there was a steep fall in oil price, both in domestic and global market and

in support report was obtained from soyabean processor association of India

and also quotation from recognized broker in soyabean oil trading business.

He demonstrated the fall in market price between the December, 2004 to

February, 2005. The plea of the assessee in this regard was that due to steep

fall in the price of oil in the Indian market, the assessee requested its AE to

cancel the supply of balance unshipped quantity of crude soyabean oil vide

letter dated 02.02.2005. However, LD Asia pointed out that it would suffer

bigger loss and compensation @ USD 61 PMT on the balance unshipped crude

soyabean oil was asked for. The parties agreed to the compensation @ USD

55 per MT vide letter dated 03.02.2005. Before the CIT(A), the assessee

submitted letter dated 10.01.2005 from its AE informing that out of total

quantity of 10,000 MT approximately 3,100 MT of crude soyabean oil would be Page | 6

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shipped in next few days and the remaining quantity would be shipped by the

end of February, 2005. This letter was even filed before the Assessing Officer

and the case of the assessee was that based on the mutual agreement between

the parties, there was extension of the contract between the parties and the

contention of the TPO that contract was valid only for shipment in the month

of January, 2005 was completely incorrect. The assessee also filed evidence of

the AE selling 5,000 MT of crude oil at USD 488 PMT. The case of the

assessee before the CIT(A) was that all these evidences were filed before the

TPO vide letter dated 22.10.2008 whereas the TPO passed an order within 5

days i.e. 27.10.2008 without considering the same. The CIT(A) vide para 3.3(ii)

observed that the cancellation of the contract was agreed on 02.02.2005 on the

request of the assessee, which was confirmed by the AE vide letter dated

03.02.2005. The said correspondences had no reference to any other

correspondence in the month of January, 2005 for extending the date of supply

to February, 2005. In this regard, the assessee pointed out that there was fax

message dated 10.01.2005 wherein the AE communicated that the balance

quantity would be shipped in February, 2005. Since this evidence was not

submitted before the TPO, the same was confronted to him and he pointed out

that the same should not be admitted. The assessee filed re-joinder in this

regard. The CIT(A) after admitting the evidences filed by the assessee and

considering the Remand Report observed that only dispute which needs to be

resolved is whether on the date of cancellation of supply of balance quantity of

soyabean oil on 2/3rd February, 2005 was there any valid contract. The CIT(A)

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holds that the correspondence dated 10.01.2005 do not find mention in the

cancellation letter of February, 2005 and even the certificate from the auditor

in support, was held to carry no evidentiary value. Further, the assessee filed

several documents, which were filed before the RBI and observed that the letter

dated 10.01.2005 was not examined by the RBI. Accordingly, he upholds the

order of the TPO, as the obligation of the AE was to supply entire soyabean

edible oil during the month of January, 2005. He holds that the Arm's Length

Price of the washout charges to be zero, since there was no valid contract at the

time of cancellation of contract.

purchases from AE and selling the goods in the domestic and overseas

markets. Sometimes when the transaction was not beneficial because of the

market conditions, the contracts were cancelled and washout charges were

paid. The assessee points out that during the year, the assessee had received

and paid washout charges and one transaction was in dispute. After taking us

through the sequence of events, the Ld.AR for the assessee submitted that the

TPO had benchmarked the Arm's Length Price of transaction at NIL as there

was no agreement in February, 2005. The assessee had claimed that it had

cancelled the contract in February, 2005.

pointed out that even if there was nothing in writing, there could be extension

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of contract. He then, referred to the order of TPO and pointed out that while

determining the Arm's Length Price, the TPO held that contract was not in

existence. However, by way of conduct of the parties itself, it was proved that

there was existence of contract. A contract can be extended between the

parties and the TPO cannot challenge the business decision between the two

parties. He also pointed that both the CIT(A) & TPO accepted that there was

reduction in price of crude soyabean oil, but rejected the claim on the ground

that there was no extension of contract between the parties, as in the

consequent letter, there was no mention of any extension. He referred to page

205 of the Paper Book on which details of washout charges has been filed and

pointed out that during the year, the assessee received washout charges of

Rs.77.45 lacs and paid Rs.1.65 crores. The Ld.AR for the assessee submitted

that the decision was totally driven by the market conditions, depending on the

prices in the international market, charges were fixed and this business

decision was as per commercial exigencies and same merits to be allowed.

authorities below and pointed out that it is not clear as to whether in the

contract, there was any such clauses and the second stage was whether it was

at arms’ length. He stated that the Tribunal being the last fact finding

authority, the matter may be set aside to the Assessing Officer to look at the

Arms’ Length Price of the transaction.

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length price of transaction is not disputed by the Assessing Officer or by the

CIT(A) and only dispute which needs to be decided is whether the contract was

extended or not.

issue which arises in the present appeal is claim of deduction on account of

washout charges totaling to Rs.1,65,53,271/-. The assessee had entered into

contract with its AE for the purchase of 10,000 MT of crude soyabean oil @

USD 546 PMT. The said contract was by way of contract agreement dated

04.01.2005, copy of which is placed at pages 78 to 83 of the Paper Book. The

price which was fixed was USD 546 PMT (CIF) and the shipment had to be

made during the month of January, 2005. In consideration of the said

contract, goods weighing 3,064.618 MT were received by the assessee;

however, balance goods weighing 6,922 MT were not received by the assessee

in the month of January, 2005. In this regard, the plea of the assessee was

that it had extended the contract on the communication received by the

supplier that it would not be in a position to deliver the balance goods in the

month of February, 2005. The said communication is dated 10.01.2005. It is

a fax transmission from LD Asia to the assessee company requesting for

extension of the contract vis-à-vis the period of shipping. Copy of the same is

placed at page 88 of the Paper Book. The perusal of the fax dated 10.01.2005

points that LD Asia clarifies that they were planning to ship approximately

3,100 MT of crude soyabean oil, but the remaining quantity of 6,900 MT would Page | 10

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be shipped vide the next shipment scheduled for end of February, 2005. The

assessee vide written communication dated 10.01.2005 placed at page 370 of

the Paper Book acknowledged the aforesaid fact and accepted the shipment of

balance quantity of 6,900 MT in February, 2005. However, on 02.02.2005, the

assessee communicated to LD Asia that oil market in India had collapsed and

as there was possibility of further drop in prices, request was made to cancel

the balance quantity of the contract. The said letter is placed at page 93 of the

paper Book. In reply LD Asia communicated to the assessee that they had

already fixed the vessel to ship the balance quantity of oil to the assessee. It

was also communicated that there was drop in the prices of oil in the

international market and the current price was USD 420 PMT (FOB). It was

communicated that incase the price difference of USD 61 per MT was paid,

then the contract could be cancelled. The said letter is placed at page 91 of the

Paper Book. On 3rd February itself, the assessee replied that as per mutual

agreement, they were ready to compensate LD Asia price difference @ USD 55

PMT. This communication is placed at page 92 of the Paper Book. As was the

procedure at the relevant time, assessee had to intimate the RBI seeking

permission for foreign exchange remittance. The said communication is placed

at pages 97 to 107 of the Paper Book. The letter is dated 05.05.2005.

Consequent thereto, RBI gave approval vide letter dated 31.05.2005 and the

assessee remitted USD 3,80,710 on 03.06.2005. The transaction was recorded

in the books of accounts for Assessment Year 2005-06. In such a scenario

wherein the permission had already been given by the RBI for remittance of

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washout charges on the cancellation of part of the contract between the

parties, the issue which arises is allowability of expenditure in the hands of the

assessee. Similar practice of payment of washout charges is being followed in

the nature of trade carried on by the parties. The details of washout charges

are placed at page 126 of the Paper Book under which assessee had received

such washout charges totaling to Rs.77,45,987/- from different parties over

period of several years. The assessee during the year under consideration had

claimed an expenditure of Rs.1.65 crores.

the authorities below. The only dispute which was raised was whether there

was an extension of contract or not as the said document i.e. fax transmission

dated 10.01.2005 was not before the TPO. Thus, TPO came to conclusion that

it was not a case of cancellation of contract, but a case of cancellation of

expired contract, as the said contract was valid for the month of January, 2005

itself. Another reason on which the TPO did not accept the plea of the assessee

was that the reason for not shipment of balance amount was not explained by

the assessee.

contract between the parties to purchase the goods in the month of January,

2005. Only part of goods could be purchased by the assessee, as the supplier

of the goods had requested for an extension of contract i.e. to extend the period

of shipping/delivery. The communication is dated 10.01.2005 and is also prior

to shipping of part of the contract received by assessee. The reason for Page | 12

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extending the contract was also mentioned in the said letter itself i.e.

availability of the vessel at the end of February, 2005. Simultaneously, there

was fall in the prices of crude soyabean oil and as a business decision, the

assessee communicated to LD Asia, supplier, to cancel the delivery of balance

goods. The said decision was taken in order to save the losses that the

assessee would have incurred after receipt of the balance crude soyabean oil,

as the market had collapsed and the assessee could not have been in a position

to sell the goods on profit. Another aspect of issue is that in order to make the

aforesaid payment to LD Asia, permission had to be sought from RBI, for such

remittance. The permission had been awarded by the RBI, consequent to

which only the assessee made the payment to LD Asia. In such a scenario on

the ground that the extension of contract, not being available before the TPO,

could not be the reason to deny the claim of the assessee, especially where the

assessee claims that it had filed the same before TPO. The said

communication was filed before the CIT(A), who had accepted that there was

fall in prices in the soyabean oil in the market. The only objection was whether

there was a valid contract of 2/3rd February, when the contract was cancelled.

We find no merit in the orders of the authorities below in this regard as the

contract was between the two parties and in case of business exigencies they

took a decision to extend the contract and the said contract was then cancelled

between the parties because of the market conditions. The payment of the

washout charges has been made after sanction of RBI and in such

circumstances, we hold that the assessee is entitled to claim deduction of

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Rs.1.65 crores. Accordingly we hold so. Thus, grounds of appeal raised by the

assessee in this appeal are allowed.

Order pronounced in the open court on 31st day of October, 2019.

Sd/- Sd/- (PRASHANT MAHARISHI) (SUSHMA CHOWLA) लेखा सदःय लेखा सदःय/ACCOUNTANT MEMBER �याियक सदःय लेखा सदःय लेखा सदःय �याियक सदःय �याियक सदःय/JUDICIAL MEMBER �याियक सदःय

�द�ली / �दनांक Dated : 31st October, 2019. �द�ली �द�ली �द�ली * Amit Kumar * आदेश क� ूितिल�प अमे�षत/Copy of the Order is forwarded to : 1. अपीलाथ� / The Appellant 2. ू�यथ� / The Respondent 3. आयकर आयु�(अपील) / The CIT(A) 4. मु�य आयकर आयु� / The Pr. CIT �वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, �द�ली / DR, ITAT, Delhi 5. 6. गाड� फाईल / Guard file.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार

स�या�पत ूित //True Copy//

सहायक र�जःशार, आयकर अपीलीय अिधकरण ,�द�ली �द�ली �द�ली �द�ली Assistant Registrar, ITAT, Delhi