CLP Wind Farm (India) Ltd. Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that as per Accounting Standard 11 premium on forward exchange contracts is to be amortized as expense means writing it off as revenue expenditure in the profit and loss account.
Facts-
The assessee carried on the business of generation of power and during the impugned year it had claimed expenses amounting to Rs. 38,96,97,000/-on account of forward cover premium. The same were incurred on account of forward contracts for foreign exchange entered into by the assessee company to mitigate any foreign currency exposure arising out of fluctuation in foreign currency rate. The foreign exchange ,he stated was required for repayment of foreign currency loan taken by way of external commercial borrowings to develop its various projects in the renewal energy sector being carried out at various locations.
Conclusion-
A bare perusal of the above reveals that AS-11 prescribes how the effects of changes in foreign exchange rate is to be accounted for on transactions undertaken in foreign currency or in foreign country. One of the effects dealt with the standard relates to premium paid on foreign exchange cover. Thus with respect to the issue before us, undoubtedly it is AS-11 which prescribes the method of accounting for the same and it recommends the premium paid on foreign exchange forward contracts to be amortized as expense or income over the life of the contracts. The term expense has been used in juxtaposition with income and its meaning has to be derived in conjunction and consonance with the term “income”, which undoubtedly is revenue receipts. There is no doubt therefore that the recommendation by AS-11 of writing off the premium on forward exchange contracts as expense means writing it off as revenue expenditure in the profit and loss account. The language of the Accounting Standard is very clear when it recommends amortizing the premium as expense or income. The claim of the assessee therefore clearly is in accordance with AS-11 of the ICAI.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The present appeals all relate to the same Assessee, pertaining to Assessment Year (A.Y) 2014-15 to 2016-17 and are against separate orders passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad, (in short referred to as CIT(A)), u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”).
2. It was common ground that in all the appeals there was common issue involved relating to claim of premium paid on forward covers of foreign exchange rates. All the appeals were therefore taken up together for hearing and are disposed of by way of this common consolidated order for the sake of convenience.
3. We shall be dealing with the facts in the case of the assessee pertaining to A.Y. 2014-15 in ITA No. 1110/Ahd/2018 and our decision rendered therein will apply mutatis mutandis to the rest of the appeals also.
ITA No. 1110/Ahd/2018 for A.Y. 2014-15
4. The grounds raised by the assessee pertaining to the disallowance of forward cover premium in the impugned year reads as under:
1. In law and in the facts and circumstances of the case, the learned CIT(A) has erred in holding that forward cover premium of Rs.38,96,97,000/- claimed by appellant is capital expenditure as against revenue expenditure claimed u/s 37(1) of the Act. The CIT(A) ought to have allowed the same as revenue expense.
5. Drawing our attention to the facts of the case as stated in the orders of the authorities below, ld. Counsel for the assessee pointed out that the assessee carried on the business of generation of power and during the impugned year it had claimed expenses amounting to Rs. 38,96,97,000/-on account of forward cover premium. The same, he pointed out, was explained to the Assessing Officer (A.O.), were incurred on account of forward contracts for foreign exchange entered into by the assessee company to mitigate any foreign currency exposure arising out of fluctuation in foreign currency rate. The foreign exchange ,he stated was required for repayment of foreign currency loan taken by way of external commercial borrowings to develop its various projects in the renewal energy sector being carried out at various locations. He contended that it was pointed out to the authorities below that the claim of the said premium as revenue in nature was in accordance with prescribed norms, i.e (i) it was in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), (AS-11) in this regard. (ii) it was in accordance with the Income Computation and Disclosures Standards (ICDS) recommended by the Act for computing income from business and profession under the Income Tax Act. (iii) was in accordance with various decisions of the Hon’ble High Courts and the ITAT.
5. He contended that the Revenue authorities, however found no 6erit in the contention of the assessee stating that the neither the Accounting Standards nor the ICDS prescribed claiming the premium paid for forward exchange contracts to the Profit and Loss account. And further noting that the premium paid was in relation to foreign currency loan taken for execution of projects it was capital in nature .Our attention was drawn to the findings of the Ld. CIT(A) at Para 3.4 of his order as under:
3.4. From the above facts of the case, it is seen that the appellant has availed various external commercial borrowings in order to develop its capital project. The issue under consideration is whether amortized amount of premium, paid to obtain forward contract to mitigate the risk of exchange rate fluctuation on such contract is allowable as revenue expenditure as claimed by the appellant in the return of income. It is amply clear that the expenses incurred by the appellant are in relation to and connected with the principal part of the appellant’s liability and not the interest. It is pertinent to mention that Para-37 of ICAI says that premium on forward exchange contract is to be accounted for separately from the exchange differences on the forward exchange contract. However, this does not stipulate that it has to be recognized as expenditure in the profit and loss account. Thus, AS-11 does not support the plea of the appellant. Similarly the recent /CDS provisions as referred by the appellant nowhere states that such premium is to be recognized as an expenditure in profit and loss account and even such /CDS are not applicable in current assessment year. The most significant point is the fact that the amount in question is intricately linked to the principal component of the instant ECB loan and does not represent interest cost on such borrowings and hence such repayment cannot be claimed as revenue expenditure. Such forward premium which is linked to the equated monthly instalment payments of such loan cannot be allowed as allowable revenue expense as it is directly linked to the principal component of the loan which is on capital account.
7. Ld. Counsel for the assessee reiterated his contentions before us stating that the claim of premium paid on foreign exchange contracts was in accordance with the Accounting Standards issued by the ICAI in this regard and as per the decision of the Hon’ble Apex Court in the case of CIT-VI vs. Virtual Soft Systems Ltd. [2018] 404 ITR 409 holding that where there was no specific bar in the Act regarding application of Accounting Standards prescribed by the ICAI, deduction on the basis of these Accounting Standards was to be allowed. He further reiterated that the claim was in accordance with the accounting standard prescribed by the Act in ICDS issued. He further drew our attention to the following case laws pointing that the issue was directly covered by the same.
(i) Deep Industries Ltd. vs. DCIT in ITA NO. 2910/Ahd/2017 dated 04/01/2021
(ii) DCIT, Circle-2(1),Guntur vs. Maddi Lakshmaiah &Co. Ltd. [2017] 166 ITD 69 (Visakhapatna-Trib.)
(iii) CIT vs. Britannia Industries Ltd. [2015] 63 com 16
(iv) CIT vs. Industrial Finance Corporation of India [2009] 185 com 296 (Delhi).
8. Ld. D.R. per contra relied on the order of the authorities below contending that
