Bechtel India Pvt. Ltd. Vs ACIT (ITAT Delhi)
Hedging forward contracts of foreign currency cannot be marked to market (MTM) on balance sheet date as already there is a underlying asset and there is no extra outgo for settlement of the forward contract other than already determined in the contract and thus there is no additional liability or benefit to the assessee on the settlement date. Once there is no liability or benefit on the settlement date, there is no possibility of liability or benefit to the assessee on balance sheet date also.
Full Text of the ITAT Order is as follows:-
This appeal by the assessee is directed against the order of the assessing officer dated 27-1-2017 for assessment year 2009-10. The Income-Tax Appellate Tribunal (in short ‘the Tribunal’) in its order dated 14-10-2015 for the year under consideration, in ITA No. 882 /Del/2014, restored the issue of “marked to market” (MTM) losses on forward contracts for afresh adjudication to the learned “Dispute Resolution Panel (in short ‘the DRP’). The learned DRP in compliance to the direction of the Tribunal issued direction to the assessing officer on 30-12-2006. In pursuant to the direction of the learned DRP, the assessing officer passed the impugned order in terms of section 254/143 (3) read with section 144C of the Income Tax Act,1961 (in short ‘the Act’). Grounds of appeal are reproduced as under:
“Following grounds of appeal are independent of, and without prejudice, to each other:
1. That on the facts and circumstances of the case and in law, the order dated 27 January 2017 passed by the Assistant Commissioner of Income Tax, Circle 4(2), New Delhi (‘Ld. AO’) is bad in law being contrary to facts of Appellant’s case and provisions of the Income Tax Act, 1961 (‘the Act’). The learned assessing officer has erred in facts and in law in making the disallowance of INR 21,80,46,325 incurred by the Appellant on re-measuring of foreign exchange forward contracts (‘MTM losses’)
2. That on the facts and circumstances of the case and in law, the order passed by the learned assessing officer is barred by limitation as stipulated under section 153 of the Act and hence liable to be quashed.
3. Without prejudice to the above, that on facts and circumstances of the case and in law, the Dispute Resolution Panel – 1 (‘Ld. DRP’) erred in directing the learned assessing officer to disallow the loss of INR 21,80,46,325 towards MTM losses as on balance sheet date without appreciating the order dated 14-10-2015 passed by the Hon’ble Income Tax Appellate Tribunal (TTAT’) while setting aside the matter back to the file of learned assessing officer / learned DRP.
4. That the learned DRP has erred in directing the learned assessing officer to disallow the MTM losses of INR 21,80,46,325 even though the Hon’ble ITAT in its order dated 14-10-2015, in view of the ratio laid by the Hon’ble Supreme Court in the case of Woodward Governor (312 ITR 254), in principle agreed that the MTM losses claimed by the Appellant is allowable under section 37(1) of the Act as the Appellant is following mercantile system of accounting. The learned DRP has further erred in holding that the Appellant failed to file necessary evidence to substantiate its claim for deduction of MTM losses.
5. That on the facts and circumstances of the case, the learned assessing officer has erred in facts and in law in passing the order in a malafide manner without taking into consideration the material furnished on record.
6. That the learned DRP / learned assessing officer erred in placing reliance onInstruction No. 3/2010 dated 23-3-2010issued by the Central Board of Direct Taxes, as this Instruction is issued with respect to assessees trading in forex-derivatives. Also, the Instruction is issued after the year under consideration. Thus, accordingly the same is not applicable to the Appellant. Further, the said Instruction is ultra vires to the scope of section 119 of the Act being prejudicial to the interest of the Appellant.
7. That the learned assessing officer has erred in charging interest under sections 234B and 244A of the Act.
8. That on the facts and in circumstances of the case and in law, the learned assessing officer has erred in initiating penalty proceedings under section 271(l)(c) of the Act.
9. That the appellant reserves its right to alter or amend any ground of appeal or add any further grounds either before or at the time of hearing of this appeal.
2. The facts in brief of the case are that during the relevant period, the assessee company provided “Engineering & Design Service” etc. to its Associated Enterprise (AEs) and raised invoices from time to time. To safeguard any losses in sales invoices raised, on account of exchange fluctuation in foreign currency, the assessee entered into 9 Forward Contracts with the Bank of America on 6-8-2008. These forward contracts were to be matured in the period from 3-4-2009 to 4-12-2009. The contracted rate of currency exchange varied from $1 USD equivalent to Indian Rs. 42.97 to Rs. 43.55. According to the assessee, the exchange rate of the US dollar in forward market as on 31-3-2009 in respect of various maturity date of contracts varied from Rs. 50.78 to Rs. 51.49 and thus the assessee re-measured its forward contract on 31-3-2009 at prevalent forward market exchange rate and computed total loss of Rs. 21,80,46,325, which was debited to the profit and loss account under the head “exchange difference “and claimed in the return of income. The particulars of the forward contracts taken and the computation of “MTM” loss of Rs. 21,80,46,325, submitted by the assessee before the learned DRP, is reproduced as under:
