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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: Shri C.N. Prasad & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against directions of the DRP-2, Mumbai u/s 144C(5) of the Income-tax Act, 1961 and it pertains to AY 2013-14. The assessee has raised the following grounds of appeal:-
“1. The Hon'ble DRP and consequently Id AO have grossly erred in law and on facts and circumstances of the assessee's case in making an adjustment of ^19,84,20,8117- in relation to disallowance of foreign exchange loss claimed by the assessee and ?1,87,3297- on account of delay in deposit of employees' contribution to PF7 ESIC.
2 ITA 383/Mum/2018
2. The order of assessment dated 22nd November, 2017 u7s 143(3)71440(13} of the Act, passed by the Id AO consequent to directions of Id DRP is bad in law. GROUNDS OF APPEAL
AGAINST CORPORATE-TAX GROUNDS 3. The Hon'ble DRP and consequently Id AO have erred in facts and circumstances of the case in making a disallowance of? 19,84,20,8117- on account of Foreign Exchange Loss on reinstatement of foreign currency trade balances: a) by wrongly alleging that the loss was on account of reinstatement of trade advances received by the assessee from its AE that were in the nature of capital financing and not trade advances from sundry creditors, as stated by the assessee. b) by not appreciating corrects facts that the asessee has not incurred such Foreign Exchange Loss on reinstatement of trade advances but reinstatement of amounts payable to the AE on account of purchase of minerals. The Hon'ble DRP and consequently Id AO have ignored the fact that in respect of trading advances received, the assessee actually has a Foreign Exchange Gain of ? 5,32,17,376/- and f 19,84,20,811/-wasjust the net loss. c) by not appreciating that the advances received from the AE by the assessee are in compliance with the terms of trade agreed between the two entities which require the full payment for sale of rice by the assessee to the AE to be received in advance by the assessee. d) by treating the Foreign Exchange Loss as contingent as per the CBDT instruction 03/2010, even though the said instruction is not applicable to the instant case. e) By not following the judgment of the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. [TS-40-SC-2009].
4. The Ld. DRP and consequently Id AO have erred in law and on facts and circumstances of the case in making a disallowance of ? 1,87,329/- on account of late payment of employee's contribution towards Provident Fund/ Employee State Insurance Corporation, even though such amounts were paid before the due date of the return of income.
5. That the Ld. A.O has erred in law in computing the interest u/s 234B and 234C on the alleged tax payable.
6. That the Ld. A.O has erred in law in initiating penalty proceedings u/s 271(1)(c) for alleged concealment of income.”
The brief facts of the case are that the assessee is an Indian company registered under the Companies’Act, 1956 as the wholly owned subsidiary of Phoenix Commodities Pvt Ltd(British Virgin Islands)(BVI). The assessee is part of the Phoenix group which is a global value chain manager of commodities in food staples and natural resources. During the year under consideration, the assessee has been engaged in the business of trading in agricultural produce
3 ITA 383/Mum/2018 such as Indian Premium Rice (Basmati), Non-Basmati Rice (NBR), chickpeas, turmeric, etc and trading of minerals, largely dealing with non cooking coal and manganese ore. During the year under consideration, the assessee has sold rice to its holding company. The assessee has conducted TP study in order to benchmark its international transactions with its AE and applied TNMM as most appropriate method. During the course of assessment proceedings, the AO referred the international transactions to the TPO, who, vide his order u/s 92CA(3), has suggested TP adjustment of Rs.50,56,34,292 to the arm’s length price in respect of export of NBR. The AO completed assessment u/s 143(3) r.w.s. 144C(13) of the I.T. Act, 1961 and made transfer pricing adjustment as suggested by the TPO. The AO has also made addition of Rs.34,85,54,990 towards security premium u/s 68 of the Act. Similarly, the AO has made addition towards mark to market foreign exchange loss on account of re- statement of debtors and creditors at the end of the financial year on the ground that such loss is a notional loss and hence, the same cannot be allowed as a deduction for Rs.19,84,20,811. The AO has also made addition towards belated payment of employee contribution to provident fund u/s 36(1)(va) r.w.s. 2(24)(x) of the Act.
Aggrieved by the draft assessment order, the assessee had filed objections before the DRP-2, Mumbai. The assessee has challenged TP
4 ITA 383/Mum/2018 adjustment made by the AO towards sale of NBR to its AE and filed elaborate written submissions on the issue. The assessee has also relied upon various judicial precedents. Similarly, the assessee has challenged addition made by the AO towards security premium u/s 68 of the Act, addition towards mark to market losses on foreign exchange fluctuation on account of re-statement of debtors and creditors and also addition made by the AO towards delayed payment of employees contribution to provident fund. The DRP-2, Mumbai, after considering the submissions of the assessee and also on taking note of remand report of the AO, deleted TP adjustment suggested by the TPO in respect of sale of NBR on the ground that the TPO applied rate of only one variety of rice to benchmark the entire sale of the assessee. This variety comprised only 2.9% of assessee’s total turnover and if the price is compared with respect to only this variety, then assessee’s receipts are more than what is contemplated as per bloomberg data. Therefore, no adjustment could be made on the basis of bloomberg data and hence, the adjustment made by the TPO has been directed to be deleted. Similarly, the DRP deleted addition made by the AO towards security premium u/s 68 of the Act on the ground that since the amount of share capital has been received in financial year 2011-12 relevant to AY 2012-13, the same cannot be added in the current year.
Further, share against this money were allotted in the current financial year
5 ITA 383/Mum/2018 and also as money was not credited into the books of the account in current year, no addition could be made for the current year. As regards mark to market loss on foreign exchange on account of re-statement of debtors and creditors, the Ld.DRP upheld addition made by the AO on the ground that the amounts given to assessee was not as sundry creditors, but was on account of capital financing. Any re-statement of amount received on capital financing cannot be allowed as business expenditure. Therefore, the same has to be treated as capital in nature. Similarly, the Ld.DRP upheld addition made by the AO towards delayed payment of employees contribution to provident fund on the ground that the CBDT in circular No.22 of 2015 has clarified with regard to tax treatment of delayed payment of employees contribution to welfare funds, which are governed by section 36(1)(viia) of the I.T. Act, 1961, as per which, if employees contribution to provident fund is not paid on or before the due date applicable under the respective Act, then the same cannot be allowed as deduction u/s 43B of the Act. Therefore, the addition made by the AO was sustained. Aggrieved by the DRP’s order assessee is in appeal before us.
The first issue that came up for our consideration from assessee’s appeal is addition towards mark to market loss of foreign exchange fluctuation loss on re-statement of foreign currency debtors / creditors. The facts with regard to the impugned dispute are that during the year, the assessee has incurred
6 ITA 383/Mum/2018 foreign exchange fluctuation loss on account of re-statement of creditors / debtors of Rs.19,84,20,811. The AO has proposed an adjustment on the unrealised foreign exchange loss by following the CBDT circular No.3 of 2010 which deals with the issue of mark to market unrealised foreign exchange gains / loss. According to the AO, the loss claimed by the assessee on account of fluctuation in foreign exchange is a notional loss and also such loss is on account of capital account. Therefore, the same cannot be allowed as deduction.
The Ld.AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “K”in the case of ACIT vs M/s Dow Agrosciences India (P.) Ltd (2017) 88 taxmann.com 676 where the Tribunal held that loss incurred on account of re- statement of debtors and creditors balances at the end of the financial year cannot be considered as notional loss and the same was allowable u/s 37(1) of the Act. The Ld.AR further submitted that while dealing with the issue, the Tribunal has followed the decision of Hon’ble Supreme Court in the case of CIT vs Woodward Governor India (P.)Ltd (2009) 312 ITR 254 where the issue has been decided by the Hon’ble Supreme Court and held that loss on account of adjustment of loss or gain on account of fluctuation in foreign currency has to be allowed, whether such loss is on account of revenue account or capital
7 ITA 383/Mum/2018 account. The Ld.AR further submitted that facts for the year under consideration are identical to the facts considered by the Tribunal in the case of ACIT vs M/s Dow Agrosciences India (P.) Ltd (supra) where the assessee has filed complete details before the AO as well as DRP to prove that the assessee has re-stated liabilities on account of trading account, therefore, there is no merit in the findings of the DRP that the said loss is on account of capital account.
The Ld.DR, on the other hand, strongly supporting order of the DRP submitted that although the assessee claims to have re-stated sundry creditors, but in reality, the same is on account of capital financing by the AE. The amounts were never squared up. They remained at very high level through out the year. The AE kept on paying the assessee for purchases even when substantial amount was due to them from the assessee. This shows that the amount was not sundry creditors, but was on account of capital financing.
We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. It is an admitted fact that forex loss on account of exchange gain / loss due to the fluctuation in currency is an allowable deduction provided such loss is on account of revenue in nature. This legal proposition has been laid down by the Hon’ble Supreme Court in the case of CIT vs Woodward Governor India (P.)Ltd (supra) where the 8 ITA 383/Mum/2018 Hon’ble Supreme Court has considered the issue in light of provisions of section 43(5)(d) and held that adjustment on account of change in rate of currency to the amounts outstanding at the end of the financial year whether gain or loss needs to be allowed as deduction provided such loss is on account of revenue account. The ITAT, Mumbai Bench “K” in the case of ACIT vs M/s Dow Agrosciences India (P.) Ltd (supra) has considered an identical issue and by following the decision of Hon’ble Supreme Court in the case of CIT vs Woodward Governor India (P.)Ltd (supra) held that loss occurring to the assessee on revaluation of debtors and creditors balances on the basis of foreign exchange fluctuations could not be treated as notional / speculation loss and the same was allowable u/s 37(1) of the Income-tax Act, 1961. In this case, the claim of the assessee was that the loss occurred on account of re- statement of sundry debtors / creditors arose out of export business. The assessee has filed various details to prove that the amount received from customers as advance lying in the books of account at the end of the financial year has been re-stated to adjust change in foreign currency which resulted in foreign exchange loss. But, the AO as well as the DRP made addition towards foreign exchange loss mainly on the ground that the amount outstanding at the end of the year was on account of capital financing and not on account of re- statement of sundry creditors which has arisen out of trading activity. The 9 ITA 383/Mum/2018 facts are contradicting each other. The assessee claims that loss arose on account of re-statement of amountreceived on account of trading activity whereas the AO / DRP state that the loss is on account of capital financing.
Therefore, we are of the considered view that although the issue has been covered by the decision of Hon’ble Supreme Court in the case of CIT vs Woodward Governor India (P.)Ltd (supra) and also by the decision of ITAT, Mumbai Bench in the case of ACIT vs M/s Dow Agrosciences India (P.) Ltd (supra), but to find out the correct facts with regard to the nature of amount outstanding at the end of the year, i.e. whether amounts outstanding is on account of advance received from customers for trading activity or it was on account of capital financing by the AE to decide the issue of allowability of mark to market loss on foreign exchange fluctuation; hence, we set aside the issue to the file of the AO and direct him to verify the facts with regard to the claim of the assessee that loss occurred on account of re-statement of advance received is on account of trading activity. If, the AO found that the loss is on account of re-statement of sundry creditors, then the same is directd to be deleted by following the decision of Hon’ble Supreme Court in the case of CIT vs Woodward Governor India (P.)Ltd (supra). Accordingly, the ground taken by the assessee is treated as allowed, for statistical purpose.
10 ITA 383/Mum/2018
The next issue that came up for our consideration is disallowance of employees contribution to provident fund u/s 36(1)(va) r.w.s. 2(24)(x) of the Income-tax Act, 1961. The AO has disallowed employees contribution to PF for delayed remittance of contribution to such fund beyond the due dates specified under the respective Acts. It is the contention of the assessee that although the provident Fund contribution has been remitted beyond the due dates specified under the Act, but such remittance has been made on or before the due date of filing the return of income, therefore, the same is required to be allowed u/s 43B. In this regard, the assessee has relied upon the decision of Hon’ble Supreme Court [2009] 319 ITR 306 (SC) in the case of CIT vs Alstorm Extrusions Ltd and the decision of Hon’ble Bombay High Court in the case of CIT vs Ghatge Patil Transport 368 ITR 793 (Bom) where it was held that employees contribution to PF, even if made beyond the due date prescribed under the relevant Act is liable for deduction u/s 43B of the I.T. Act, 1961, if the same is paid on or before the due date of filing the return of income u/s 139(1) of the Act. The Ld.AR further submitted that the assessee, although remitted employees contribution to PF beyond the due date specified under the respective Act, but such payment has been made on or before the due date for filing return of income u/s 139(1) of the Act and hence, in view of specific
11 ITA 383/Mum/2018 provisions of section 43B, if such payment is made before due date of filing return of income, no disallowance could be made.
We have heard both the parties and perused the material available on record. There is no dispute with regard to the fact that the assessee has remitted employees contribution to PF beyond the due date prescribed under the PF and miscellaneous Act, but such payment has been made on or before the due date of filing return of income u/s 139(1) of the Act. Once employees contribution to PF is paid on or before the due date of filing the return of income, then the same is required to be considered at par with employer’s contribution to PF for the purpose of provisions of section 43B of the Income- tax Act, 1961; hence, any payment of employees contribution to PF on or before the due date of filing return of income u/s 139(1), shall be allowed u/s 43B of the Income-tax Act, 1961. This legal proposition is supported by the decision of Hon’ble Bombay High Court in the case of CIT vs Ghatge Patil Transport Ltd (supra). This legal proposition is further supported by the decision of Hon’ble Supreme Court in the case of CIT vs Jaipur Vidyut Vitran Nigam Ltd 49 taxman.com 560 where the Hon’ble Supreme Court has dismissed SLP filed by the revenue against the decision of Hon’ble Rajasthan High Court by holding that amount claimed on payment of PF & ESI having been deposited on or before due date of filing of return, same cannot be disallowed u/s 43B or 12 ITA 383/Mum/2018 u/s 36(1)(viia). In this view of the matter and respectfully following the case laws discussed hereinabove, we are of the considered view that the AO was erred in disallowing employees contribution to PF u/s 43B, even though such payment has been made on or before due date of filing return of income u/s 139(1) of the Income-tax Act, 1961. Hence, we direct the AO to delete addition made towards disallowance of employees contribution to PF.
In the result, appeal filed by the assessee is partly allowed, for statistical purpose.
Order pronounced in the open court on 19-06-2019.