Case Law Details
Brief of the case
In the case of D.C.I.T. vs Autoline Industries Ltd, Pune Tribunal held that foreign exchange cover taken by the assessee from DBS Bank was in order to prevent itself from future currency rate fluctuations. Later, it had to close its agreement with DBS Bank in view of the offer made by the principal lender i.e. Citi Bank. The pre-payment charges/commitment charges paid to DBS Bank relating to the cancellation of the said foreign exchange cover was on account of business agreement entered into by the assessee, which because of its business exigencies, had to be foreclosed. The expenses have been incurred for purpose of business are incidental to carrying on of the business by the assessee, are allowable as expenditure under section 37(1) of the Act.
Fact of the case
The assessee was engaged in the business of auto ancillary unit. The assessee raised loan from Citi Bank in September, 2007 of $ 10 million ECB (Rs.39.75 Cr. INR) for acquisition of DEP Autoline LLC, USA, Autoline Industries, USA, Inc. and purchase of fixed assets at its Chakan Plant. In order to mitigate the risk involved in possible higher payment due to fluctuations in rate of exchange, the assessee entered into forward cover with DBS Bank at 7% p.a., all inclusive of interest and forward cover. Afterwards, Citi Bank being the principal lender offered the assessee, the forward cover at the rate of 6.75% p.a. on the same terms as of DBS Bank. In order to cancel the contract with DBS Bank, the assessee paid commitment charges of Rs.1,10,44,575/- for cancellation of forward contract. The assessee also paid interest of Rs.74,65,795/- to Citi Bank for the period 29.01.2008 to 31.03.2008. Out of this interest, sum of Rs.49,35,896/- was capitalized by the assessee, which included interest for acquisition of foreign subsidiary and balance for acquisition of fixed assets and remaining sum of Rs.25,29,899/- for acquisition of assets of Chakan plant, was charged to the Profit & Loss Account. The Assessing Officer was of the view that the loan taken from Citi Bank was for acquisition of fixed assets and also for acquisition of foreign entity, the foreign exchange fluctuation cover taken by the assessee was also in relation to the said loan for acquiring fixed assets and foreign acquisition, hence, the same was expenditure in capital field. Since the Chakan plant had already been put to use, therefore, the Assessing Officer allowed the expenditure on commitment charges relatable to the said plant as allowable under section 37(1) of the Act, but the commitment charges relatable to acquisition of shares of foreign subsidiaries treated as capital expenditure not allowable under section 37(1) of the Act. On an appeal, the CIT(A) after deliberating upon various case laws relied upon by the assessee including the decision of Hon’ble Bombay High Court at Goa in CIT Vs. Phil Corporation Ltd. and Anr. (2011) 202 Taxman 368 (Bom) held that where the shares in the subsidiary companies had been purchased, to have control rights on them for carrying on of the business relating to the assessee’s activity, the commitment charges of the bank guarantee fees relating to loan for capital assets and where payment had been made for its early termination, is an expenditure incurred in the course of carrying on the business and has to be allowed as expenditure under section 37(1) of the Act. Being aggrieved, the revenue filed appeal before the Tribunal.
Contention of Revenue
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