ACIT, CENTRAL CIRCLE-2(2), KOLKATA, KOLKATA vs M/S REDTECH NETWORK PVT. LTD., KOLKATA

Income Tax Appellate Tribunal, BENCH ‘C’ KOLKATA

Before: Hon’ble Shri S.S.Godara, JM & Shri M.Balaganesh, AM ]

ITA No.17/Kol/2017 M/s Redtech Network Pvt. Ltd. A.Y.2010-11 1

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘C’ KOLKATA [Before Hon’ble Shri S.S.Godara, JM & Shri M.Balaganesh, AM ] ITA.No.17/Kol/2017 Assessment year : 2010-11

A.C.I.T., Circle-2 (2) Vs M/s Redtech Network Pvt. Ltd. Kolkata Kolkata (PAN: AABCB 5398 J) (Appellant) (Respondent)

For the Appellant: Shri Sanjay Mukherjee, Addl. CIT For the Respondent: None

Date of Hearing : 11.06.2018. Date of Pronouncement : 22.06.2018.

ORDER PER S.S.GODHARA, JM This Revenue’s appeal for A.Y.2010-11 challenges correctness of the CIT(A)- 1, Kolkata’s order dated 20.10.2016 passed in Appeal No.1084/CIT(A)-I/C-2(2)/2014- 15 reversing the Assessing Officer’s action disallowing assessee’s foreign exchange fluctuation loss of Rs.35,79,659/- as well as they are u/s 40(a)(ia) of Rs.25,99,909/- made in assessment order dated 27.02.2015 involving proceedings u/s 144C r.w.s. 144C(5) r.w.s. 143(3) of the Income Tax Act, 1961 (Act).

We come to the former issue of disallowance of foreign exchange fluctuation loss of Rs.35,79,659/- deleted in the course of the lower appellate proceedings as under :- “I have considered the material before me. The A.O held that the 'unrealised' loss of Rs. 685,30,676/- on foreign exchange as provisional loss which was adjusted with 'realised' gain of Rs. 6,49,51,016/- on foreign exchange. It was observed that the provisional loss has been set-off with gain from the foreign exchange fluctuation and the net amount of Rs. 35,75,659/- has been debited to the P&L Account and claimed as deduction. According to the A.O, the CBDT has Issued 'instruction' (No.' 3/2010 dated 23.03.2010) regarding tax implications of forward foreign exchange contracts and relying on said Instruction, concluded that the appellant has undertaken hedging and loss for the entire future period for which the payment is still to be made has been debited as a provision and the same was

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held to be not allowable relying on Instruction No. 3/2010 (supra). Hence, Rs. 35,79,659/-, being provision for future loss on foreign exchange fluctuation was disallowed as deduction and added back to the total income.

The appellant's A. R has contended that M/s Bonsai India receives 70% of the net revenue received by UCT, Inc. from the end user in respect of both Software and Engineering Products while UCT, Inc. retains the balance 30%, and from statements of impugned transactions that 'the transactions were not in the nature of foreign exchange "derivative transactions" or in the nature of Capital Loss'. The submissions of the company were summarily and casually dismissed without giving any reason by simply stating in the impugned order "it is found that the claim of the assessee has no merit”. In other words, the Ld. DCIT found that the transactions were in the nature of foreign exchange "derivative transactions" or in the nature of capital loss" in spite of having definite proof that they were not so. A Perusal of the statements filed will bear testimony to the fact that 'the transactions were not in the nature of foreign exchange "derivative transactions "or in the nature of Capital Loss'. '

The A.R has argued that apparently, the A.O had already made up his mind to disallow the loss due to foreign exchange fluctuations without bothering to study the statements filed. Had perused the statements filed, he would have found that the loss in foreign exchange had arisen mainly due to restatement of monetary items in foreign currency (cash, receivables, payables etc.) using the exchange rate on the Balance Sheet date, namely, 31st March, 2010. As a result, the Ld. DCIT deliberately disregarded the specific direction of the Hon'ble DRP thereby violating the provisions of section 144C (10) which reads as under:

"( 10) Every direction issued by the Dispute Resolution panel shall be binding on the Assessing Officer. "

The direction was to verify that the transactions were not in the nature of "derivative transactions" or in the nature of "capital loss". Once it is established that they were not so, the Ld. DCIT has no option left than to allow the loss on foreign exchange transactions. It has 'been held in a number of cases, old and new, that "The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. " [Agrawal Warehousing & Leasing Ltd. vs. CIT 257 ITR 235(M.P.) followed in DCIT vs. Sham Sunder Sharma (ITAT Chandigarh) ITA No. 966/Chd/2014]

The appellant's A. R has averred that as per the agreement between Bonsai India and UCT Inc. USA, for any order procured, the US subsidiary, UCT Inc. books 30% of the Revenue and passes on the balance 70% to its holding company, Bonsai India. (The earlier sharing ratio was 60:40). It can also be seen from audited accounts that 77% of Bonsai India's sales of software services /

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products were through its 100% subsidiary, UCT Inc. USA. As a result, receivables / payables featuring prominently UCT Inc. USA will be in foreign currency and it is normal that such receivables / payables at the end of the financial year, in this case,· FY 2009-10, have to be restated using the exchange rate on the Balance Sheet date, namely, 31st March, 2010. This is what has happened in the instant case. Such transactions are definitely not in the nature of “derivative transactions” or in the nature of “capital loss “.

On careful consideration of the material on record, it is found that the A.O had treated the amount of Rs. 35,79,659/- claimed as foreign exchange fluctuation loss as debited to the P/I by the appellant company. The AO in the assessment order after referring to CBDT instruction no. 3/2010 held that the transaction entered into by the appellant was on account of hedging and was a provision for the future period for which payment was still to be made and disallowed the appellant's claim for loss. The appellant's AR had mainly argued that the AO had misconstrued the direction of the DRP, Kolkata vide its direction dated 29.12.2014, to the AO to verify the nature of transaction from the accounts of the assessee and allow the claim after duly ascertaining from the same that the transaction were not in the nature of foreign exchange "derivative transaction" or in the nature of capital loss.

I find that there is merit in the appellant's submission that the claim of net loss of Rs. 35,79,659/- had a reason due to restatement of monetary items in foreign currency (cash, receivables. Payable, etc) using the exchange rate on the balance sheet date, i.e. 31.03.2010. it was further argued that in support of the claim relevant statements were filed which showed the amount of gain or loss and had a reason showing that the transaction were not in the nature of foreign exchange derivative transaction or in the nature of capital loss. Moreover, the appellant's AR had also enclosed the copy of the ledger account in respect of "exchange rate difference" along with the written submission which were filed vide pages 56 to 59 of the paper book to substantiate the claim that the transaction were not in the nature of foreign exchange "derivative transaction" or in the nature of capital loss. In addition, the AR has also stated that AO has disregarded the specific direction of DRP vide provision of section 144C(10) as once it was established that" the transaction were not in the nature of capital transaction or derivative transaction the AO ought not to have disallowed the same for which reliance was place on decision by ITAT in the case of Agawal Warehousing & Leasing Ltd Vs CIT 257 ITR 235(MP) followed in DCIT Vs. Shan Sundar Sharma (ITAT Chandigarh) ITA NO. 966/Chd/2014. In view of the above discussion, since the nature of the transaction in question were found to comprise of Net Loss on foreign exchange on account of restatement of cash receivable/payables etc in foreign currency as on 31.03.2010 the action of the AO in disallowing the amount of Rs. 35,79,659/- as provision on account of hedging is found to be not justified. The AO is directed to delete the disallowance of Rs.35,79,659/-. This ground is allowed. “

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Learned Departmental Representative vehemently contends during the course of hearing that the Assing Officer had rightly disallowed the assessee’s impugned foreign exchange fluctuation loss keeping in mind the CBDT Circular No.3/2010 dated 23.03.2010 dealing with such mark to market loss arising on account of recasting of book results as per actual value of the relevant foreign financial instruments on the closing day of the accounting period in question. We see no merit in Revenue’s instant argument. It emerges that the assessee had earlier approached the Dispute Resolution Panel “DRP” to issue the relevant direction to the Assessing Officer. Scope of the Assessing Officer’s verification in the instant consequential round of proceedings was very much a limited one. He had only to verify the impugned mark to market loss as not to have arisen from derivatives or in capital field. There is hardly any quarrel on such DRP’s directions are binding on an Assessing Officer u/s 144C(10) of the Act. We asked Learned Departmental Representative to pin point any specific material on record indicating the assessee either to have claimed the loss in question from derivatives or in capital field. There is no such cogent material in the case file. It further emerges that the assessee’s above extracted heads of foreign financial instruments are in revenue field. It appears to have already followed netting method in computing the impugned losses.. We thus conclude that the CIT(A) has rightly held the assessee’s impugned mark to market loss incurred on foreign exchange fluctuation to be allowable. The Revenue’s former substantive ground is rejected accordingly.

The Revenue’s latter substantive ground seeks to revive the disallowance made by the Assessing Officer on account of failure to deduct TDS u/s 194H of the Act. We find first of all that the CIT(A) has accepted the assessee’s corresponding arguments in part only in restricting the impugned disallowance to Rs.33,71,711/- as per the DRP directions (supra) holding the relevant TDS to be deductible @ Rs.17 per card u/s 194H of the Act than @ Rs.30 per card as per the Assessing Officer. It had also pleaded during the course of appellate proceedings to have paid @ Rs.30 per card which comes to Rs.25,99,909/- and not Rs.59,79,620/- in its profit and loss account.

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Be as it may, the fact remains that the DRP had issued a clear cut direction that TDS in question had to be deducted @ Rs.17 per card coming to Rs.33,71,771/- only which has already been upheld. The said findings have attained finality. We therefore see no reason to interfere with the CIT(A) action deleting the impugned disallowance in tune thereof. The Revenue’s latter substantive ground is also rejected accordingly.

This Revenue’s appeal is dismissed.

Order pronounced in the Court on 22.06.2018.

Sd/- Sd/- [M.Balaganesh] [ S.S.Godhara ] Accountant Member Judicial Member Dated : 22.06.2018. [RG Sr.PS] Copy of the order forwarded to: 1.M/s Redtech Network Network India Pvt. Ltd., Srijan Tech Park, 4th Floor, DN-52, Sector-V, Salt Lake City, Kolkata-700091. 2. A.C.I.T., Circle-2 (2), Kolkata. 3. C.I.T.(A)- 1, Kolkata 4. C.I.T-1, Kolkata 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,

Senior Private Secretary Head of Office/D.D.O, ITAT Kolkata Benches

ITA No.17/Kol/2017 M/s Redtech Network Pvt. Ltd. A.Y.2010-11 6

ACIT, CENTRAL CIRCLE-2(2), KOLKATA, KOLKATA vs. M/S REDTECH NETWORK PVT. LTD., KOLKATA