Case Law Details
Mitsubishi Electric Automotive Vs ACIT (ITAT Delhi)
ITAT Delhi held that transactions relating to currency swap contracts cannot be considered to be in the nature of speculative transaction covered u/s. 43(5) of the Act. Accordingly, the same is allowable as deduction u/s. 36(1)(iii) of the Act.
Facts- AO while examining the audited financial statement of the assessee, noticed that the assessee has debited expenditure of Rs.2,63,36,331 showing it as amortization of premium on derivative on long term borrowings. After calling for necessary details and examining them he found that the assessee has availed two long term External Commercial Borrowings (ECB)/Foreign Currency loans from a Japanese entity viz. Mitsubishi Electric Corporation (MELCO) amounting to Japanese Yen (JPY) of 511,999,000 and 730,221,000 respectively.
In order to hedge the foreign currency exposer on long term borrowings, the assessee executed currency swap contracts with Bank of Tokyo, Mitsubishi UFJ (BTMU) on 07.06.2012 and 01.01.2013. As per the terms and conditions of currency swap contracts, the assessee was obliged to pay fixed amount of rupee denominated installment to BTMU. Whereas, the obligation to repay the principal and interest amount in foreign currency to MELCO was placed with BTMU. It was explained by the assessee to the Assessing Officer that as per the swap contracts, the assessee was required to pay interest @ 7.35% or 7.59%. However, for accounting purposes, the aforesaid rates of interest were bifurcated into two portions, the first one as interest and the other one as premium. However, the entire amount is in the nature of finance cost.
AO did not accept the contention of the assessee. He observed, the availing of loan from MELCO and the currency swap contracts are two independent transactions. He observed, while the assessee has incurred interest cost on ECBs, however, the currency swap transactions are only for purpose of hedging the risk on repayment of foreign loans and repayment thereon. Therefore, he observed that the premium paid to BTMU in respect of hedging contracts are not covered under Section 3(1)(iii) of the Act.
Conclusion- The nature and character of the fixed cost on foreign currency swap contract is nothing but interest, therefore, allowable under Section 36(1)(iii) of the Act. In our view, the transactions relating to currency swap contracts entered by the assessee with BTMU cannot be considered to be in the nature of speculative transaction covered under Section 43(5) of the Act. In that view of the matter, the deduction claimed by the assessee is allowable under Section 36(1)(iii) of the Act.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeal has been filed by the assessee challenging the final assessment order dated 04.10.2017 passed under Section 143(3) read with section 144C of the Income-Tax Act,1961 pertaining to assessment year 2013-14, in pursuance to directions of learned Dispute Resolution Panel (DRP).
2. Ground nos. 1 and 2 are general grounds, hence, do not require specific adjudication.
3. In ground no.3, assessee has challenged disallowance of an amount of Rs.2,63,36,331.
4. Briefly the facts relating to this issue are, the assessee is a resident corporate entity stated to be engaged in the business of assembly of automotive component for supply to automobile manufactures. For the assessment year under dispute, the assessee filed its return of income on 29.11.2013 declaring income of Rs.73,20,89,000.
5. In course of assessment proceedings, the Assessing Officer while examining the audited financial statement of the assessee, noticed that the assessee has debited expenditure of Rs.2,63,36,331 showing it as amortization of premium on derivative on long term borrowings. After calling for necessary details and examining them he found that the assessee has availed two long term External Commercial Borrowings (ECB)/Foreign Currency loans from a Japanese entity viz. Mitsubishi Electric Corporation (MELCO) amounting to Japanese Yen (JPY) of 511,999,000 and 730,221,000 respectively. In order to hedge the foreign currency exposer on long term borrowings, the assessee executed currency swap contracts with Bank of Tokyo, Mitsubishi UFJ (BTMU) on 07.06.2012 and 01.01.2013. As per the terms and conditions of currency swap contracts, the assessee was obliged to pay fixed amount of rupee denominated installment to BTMU. Whereas, the obligation to repay the principal and interest amount in foreign currency to MELCO was placed with BTMU. It was explained by the assessee to the Assessing Officer that as per the swap contracts, the assessee was required to pay interest @ 7.35% or 7.59%. However, for accounting purposes, the aforesaid rates of interest were bifurcated into two portions, the first one as interest and the other one as premium. However, the entire amount is in the nature of finance cost. The Assessing Officer did not accept the contention of the assessee. He observed, the availing of loan from MELCO and the currency swap contracts are two independent transactions. He observed, while the assessee has incurred interest cost on ECBs, however, the currency swap transactions are only for purpose of hedging the risk on repayment of foreign loans and repayment thereon. Therefore, he observed that the premium paid to BTMU in respect of hedging contracts are not covered under Section 3(1)(iii) of the Act.
6. Having held so, he proceeded to hold that the hedging transactions between the assessee and BTMU, in reality, is in the nature of speculative transaction covered under Section 43(5) of the Act. With such reasoning, he disallowed the claimed deduction of Rs.2,63,36,331.
7. Against the aforesaid decision of the Assessing Officer, assessee raised objection before learned DRP. However, without much deliberation on the issue, learned DRP endorsed the view of the Assessing Officer.
8. Before us, learned counsel appearing for the assessee reiterated the stand taken before the departmental authorities. Whereas, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned DRP.
9. We have considered rival submissions and perused material on record.
10. As far as the factual aspect of the issue is concerned, there is no
dispute that the assessee had availed two foreign currency loans from a Japanese entity. Such foreign currency loans are in Japanese Currency ‘YEN’.
11. Keeping in view the risk involved in fluctuation in rate of exchange, the assessee wanted to safeguard its interest in respect of repayment of loans along with interest to MELCO by entering into two currency swap contracts with BTMU. Thus, there is absolutely no reason for doubt that the underlying transactions for which the assessee entered into hedging contracts are the two foreign currency loans availed from MELCO. It is also evident, the foreign currency loans were in the nature of long term borrowings for a period of three years. As per the currency swap contracts with BTMU, the assessee was required to pay interest at a fixed rate of 7.35% or 7.59% in Indian rupees as the case may be. Whereas, BTMU, in turn, was required to pay interest to MELCO in foreign currency. In other words, the assessee was not required to pay any interest directly to MELCO. It is observed, for accounting purposes, the assessee had bifurcated the fixed interest cost into two portions i.e. interest and premium. The premium portion has been claimed as amortization premium derivative on long term borrowings. However, in our view, the nature and character of the fixed cost on foreign currency swap contract is nothing but interest, therefore, allowable under Section 36(1)(iii) of the Act. As could be seen, the Assessing Officer has refused to entertain assessee’s claim, firstly, on the ground that the amount paid to BTMU under swap contracts is independent of the foreign currency loan, hence, cannot be treated as interest covered under Section 36(1)(iii) of the Act. Further, he has held that the amount paid to BTMU is in respect of speculative transaction under Section 43(5) of the Act.
12. In our considered opinion, the aforesaid reasoning of the Assessing Officer are unsustainable. As discussed earlier, as per the foreign currency swap contracts, the assessee was required to pay interest at a fixed rate in Rupee terms. Whereas, it is the liability of the BTMU to pay the principal as well as interest cost on the foreign currency loans availed by the assessee from MELCO in Japanese Yen. Therefore, in so far as the assessee is concerned, the amount paid to BTMU under currency swap contracts is nothing but interest cost on foreign currency loans. Further, as discussed earlier, the underlying transactions in relation to the currency swap contracts are the loans availed from MELCO. It is a fact on record that on repayment of loan to MELCO after the expiry of three years, the currency swap contracts with BTMU were also terminated. Therefore, in our considered opinion, the currency swap contracts are nothing but to hedge the fluctuation in foreign currency rates for protecting the assessee from the risk of paying more interest on the foreign currency loans due to exchange rate fluctuations. Therefore, in our view, the transactions relating to currency swap contracts entered by the assessee with BTMU cannot be considered to be in the nature of speculative transaction covered under Section 43(5) of the Act. In that view of the matter, the deduction claimed by the assessee is allowable under Section 36(1)(iii) of the Act.
13. In any case of the matter, even for the sake of argument assuming that the premium paid to BTMU in respect of currency swap contracts cannot be termed as interest covered under Section 36(1)(iii) of the Act, however, there cannot be any dispute that this is an expenditure incurred by the assessee wholly and exclusively for the purpose of its business, as, such expenditure is having a direct nexus with the finance cost on external borrowings. That being the case, it is otherwise allowable as deduction under Section 37(1) of the Act. Accordingly, we delete the disallowance.
14. In ground no.4, assessee has challenged disallowance of Rs.86,27,286 under Section 40(i)(a) of the Act.
15. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee had paid an amount of Rs.2,51,66,612 to Mitsubishi Corporation, Japan towards installation changes. After calling for and examining the necessary details, the Assessing Officer noticed that the assessee had deducted tax at source of an amount of Rs.1,65,39,932, whereas, he has not deducted tax on an amount of Rs.86,27,286. When called upon to explain the reason for not doing so, the assessee submitted that such amount is purely in the nature of reimbursement of cost incurred towards air-tickets and hotel bookings etc. The Assessing Officer was not convinced with the submissions of the assessee. He observed, the travelling and hotel expenses, since, are in connection with rendering of technical services, they also have to be regarded as fee for technical services (FTS). Hence, the assessee was required to withhold tax under Section 195 of the Act. Since, the assessee has not done so, the Assessing Officer disallowed the amount of Rs.86,27,286.
16. Learned Dispute Resolution Panel while considering the objections of the assessee upheld the disallowance made by the Assessing Officer.
17. Before us, learned counsel appearing for the assessee has broadly submitted as under:
- The amount represents reimbursement of cost of air-ticket, hotel billing etc. without any element of profit and based on third party invoices submitted by the payee;
- Section 40(a)(i) cannot be invoked as, the assessee has not claimed the amount as expenditure act has capitalized and claimed depreciation. In support his contention, learned counsel relied upon the following decisions:
i) SMS Demag Pvt. Ltd. vs. CIT [2010] 38 SOT 496 (Del.);
ii) Mark Auto Industries Ltd. [2013] 358 ITR 43 ( P & H );
iii) M/s. Kawasaki Microelectronics vs. DDIT, (International Taxation) – ITA No.1512/Bang/2010 [ITAT – Bangalore];
iv) DCIT vs. “FIS Solution India Pvt. Ltd. – ITA No.519/Bang/2015 [ ITAT – Pune]; &
v) CIT vs. M/s. Tally Solutions Pvt. Ltd., – ITA No. 199 of 2017 – Karnataka High Court.
18. Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and the learned DRP.
19. We have considered rival submissions and perused material on record.
20. We have also gone through the decisions relied upon.
21. Undisputedly, out of the total payments of Rs.2,51,66,612 to Mitsubishi Corporation, Japan towards installation charges, the assessee had deducted tax on an amount of Rs.1,65,39,326 by treating it as FTS. However, on balance amount of Rs.86,27,286, the assessee had not deducted any tax on the plea that these are purely reimbursement of cost of air-tickets and hotel billing without having any profit element. From the sample copies of the bills/invoices raised on the assessee, it is observed that in so far as air-tickets and hotel bills are concerned, the payee has raised separate invoices which do not comprise of any amount charged towards installation of equipments. The perusal of invoices clearly indicates that they are towards reimbursement of cost on actual basis without any profit element embedded therein. Therefore, in our view, no part of such expenditure/cost incurred can be apportioned towards technical services. Therefore, in our view, the assessee was not required to withhold tax under Section 195 of the Act on such expenditure. Even otherwise also, the amount in dispute was not claimed as revenue expenditure by the assessee. Rather, the assessee had capitalized the amount in its accounts and has claimed depreciation. In such a scenario, the issue arising for consideration is whether section 40(a)(i) of the Act would be applicable.
22. As we find from the decisions cited before us in this regard by learned counsel appearing for the assessee, the ratio laid down clearly says that section 40(a)(i) of the Act provides for disallowance only in respect of expenditure which are revenue in nature. Therefore, the provision does not apply to a case of the assessee whose claim is for depreciation. In this regard, we may specifically refer to the decision of Hon’ble Karnataka High Court in PCIT vs. Tally Solution Pvt. Ltd. (supra).
23. In view of the aforesaid, we delete the disallowance. This ground is allowed.
24. In ground no.5, the assessee has contested the disallowance of Rs.6,90,154 on account of difference in rent cost incurred by the assessee for providing accommodation to its employees and the respective perquisite value of such residential accommodation determined in the hands of the employees.
25. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had provided rent free accommodation to various employees and debited expenditure in respect thereof. After calling for and examining the necessary details, the Assessing Officer noticed that there is difference in the quantum of rent paid by the assessee on behalf of its employees and the amount taxed as perquisite at the hands of the employees. Holding that, the excess rent paid is the personal obligation of the employees which has been discharged by the assessee and it has no nexus with assessee’s business, the Assessing Officer disallowed the amount of Rs.6,90,154. While deciding assessee’s objections, learned DRP upheld the disallowance.
26. We have considered rival submissions and perused material on record.
27. The observations of the Assessing Officer would make it clear that only reason for which the Assessing Officer disallowed the differential amount between the rent actually paid by the assessee on behalf of the employees and the perquisite value of rent taxed at the hands of the employees is that it is not in connection with assessee’s business. There is no dispute that the assessee had actually incurred the expenditure. In fact, the Assessing Officer has allowed the deduction to the extent of the amount treated as perquisite value at the hands of the employees. He has disallowed the excess amount. This, in our view, is unjustified. The perquisite value to be taxed at the hands of the employees is determined by applying the methodology prescribed under the rules. Therefore, it has no relation to the actual cost incurred by the assessee. In any case of the matter, if the assessee has incurred certain expenditure for welfare of the employees to keep a contended and dedicated work force, keeping in view the commercial expediency, the expenditure can be allowed under Section 37(1) of the Act.
28. In view of the aforesaid, we delete the disallowance made by the assessee.
29. Ground no.6 is consequential in nature and ground no. 7 being a general ground is dismissed.
30. At this stage, we must observe that the assessee had also raised an additional ground on the issue of deduction on payment made towards education cess and higher education cess. However, at the time of hearing, learned counsel for the assessee did not press the ground. Accordingly, additional ground is dismissed.
31. In the result, the appeal is partly allowed.
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