Expenditure towards currency swap contract is allowable as deduction u/s 36(1)(iii)

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.

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