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
The learned Departmental Representative for the Revenue referring to the order of Assessing Officer pointed out that where the foreign exchange cover was taken for acquiring shares of foreign company and for fixed assets, then the same is not to be allowed as revenue expenditure.
Contention of Assessee
The learned Authorized Representative for the assessee on the other hand, pointed out that the commitment charges paid to DBS Bank for shifting the forward contract cover from DBS Bank to Citi Bank, which was the principal lender of the assessee was paid neither for acquisition of assets nor for any capital field and hence, was an allowable expenditure. Reliance in this regard was placed on the ratio laid down by the Hon’ble Supreme Court in DCIT Vs. Gujarat Alkalies & Chemicals Ltd., (2008) 299 ITR 85 (SC) and Addl.CIT Vs. Akkamba Textiles Ltd. (1997) 227 ITR 464 (SC). It was further pointed out by the learned Authorized Representative for the assessee that the reliance placed upon by the learned Departmental Representative for the Revenue in the decision of Mumbai Bench of Tribunal in Mahindra & Mahindra Ltd. Vs. DCIT (2006) 5 SOT 217 (Mum) is mis-placed as the facts of the said case are at variance.
Held by the Tribunal
The Tribunal after hearing the rival contentions and perusing the material available on record held that the said foreign exchange cover was taken by the assessee in order to mitigate future risks on account of fluctuation in interest rates. The assessee was compelled to accept the terms of Citi Bank as it was the principal lender to the assessee of the loan of $ 10 million ECB (Rs.39.75 Cr. INR). In order to avail the foreign exchange cover offered by Citi Bank, it had to close its agreement with DBS Bank and for pre-mature closure of the offer made by DBS Bank, the pre-payment charges/commitment charges relating to the cancellation of the said foreign exchange cover was paid by the assessee. The said commitment charges are not relatable to the acquisition of any foreign assets, but are on account of business agreement entered into by the assessee, which because of its business exigencies, had to be foreclosed, in view of the offer made by the principal lender i.e. Citi Bank. Such commitment charges paid by the assessee having been paid during the course of carrying on its business are allowable as revenue expenditure in the hands of the assessee. The same are not relatable to loan taken by the assessee from Citi Bank for acquisition of assets. However, the foreign exchange cover was taken by the assessee in order to prevent itself from future currency rate fluctuations. 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. The Tribunal found support from the ratio laid down by the Hon’ble Supreme Court in DCIT Vs. Gujarat Alkalies & Chemicals Ltd. and Addl.CIT Vs. Akkamba Textiles Ltd. for the said proposition and uphold the order of CIT(A) in this regard. The Case law relied upon by the learned departmental representative was not applicable as in the case of Mahindra & Mahindra Ltd. Vs. DCIT the assessee had taken loan in US Dollars for investment in new project and was to be utilized for the acquisition of capital assets. However, eventually, the assessee did not strictly utilize US Dollars for acquiring capital assets, but its rupee equivalent of swapping was utilized for such purpose. Where the gain arose to the assessee on cancellation of forward cover contract, the Tribunal held that the same was in the nature of capital asset. The facts of the said case are at variance to the facts of the present case. In the facts of the present case the assessee had taken forward cover contract from DBS Bank, which has not matured during the year under consideration but the same was pre-maturely cancelled and the damages paid on account of commitment charges are not akin to the gain arising from maturity of forward contract. Hence, the ratio laid down by the Mumbai Bench of Tribunal in Mahindra & Mahindra Ltd. Vs. DCIT was not applicable to the facts of present case. The Ground of appeal raised by the Revenue, thus, dismissed.