Assessee booked mart to market loss of Rs.21.80 crore as on 31.3.09 being difference in the INR value of the USD as on 31.3.09 and the value of which the hedging contract was agreed to be settled. We further note that the assessee is following mercantile system of account for recognition of this loss in its financial statements.
When we see the order of the DRP para 3.7.1, then it is amply clear that the ld. DRP has alleged that the forward contracts are not fully supported by the underlying support invoice both in terms of the amount as well as the tenure. DRP has drawn the table in this appeal and thereafter noted that out of 9 forward contracts, the assessee has only used 4 forward contract fully and the assessee has not used these forward contracts immediately but started using them against the sale invoice after the lapse of time of few months. Ld. DRP further noticed that contract no. 1461 was used for the first time on 31.10.08 for a nominal sum of USD 632 and thereafter in November for USD 144247 and balance in December 2008 for USD 2755121. Thus, it shows that there was no underlying asset for this contract from 6.8.2008 till 31.10.08. The entire forward contract could be utilised only by 31.12.08. For the sake of clarity in our conclusion para 3.7.1 of the ld. DRP order is being reproduced below:-
“3.7.1 Without prejudice to the above, in case the higher appellant authorities’ grants relief to the assessee on account of its claim discussed above, the relevant issue for consideration would be to what extent the claim made by the assessee is admissible? This for the reason that in this case, the FCs are not fully supported by the underlying export invoices both in terms of the amount as well as the tenor.
It can be seen that out of the 9 FCs, the assessee has used only 4 FCs fully. The assessee has not used these FCs immediately but started using them against the sales invoices after a lapse of time of few months. To elaborate it further, it is noticed that the contract no. 146164 was used for the first time in 31st October 2008 for nominal sum of US$ 27,55,121. Thus, it is evident that there was no underlying asset for this contract from 6.8.2008 till 31st October 2008. The entire FC could be utilized only by 31st December 2008.
Likewise the contract no. 146167 and 146169 taken on 6.8.2008 have been started to be used by the assessee from January 2009 onwards. Thus, there was no underlying asset for these contracts from 6.8.2008 till 31.12.2008.
Out of the firth FC bearing no. 146171 only a small part of US$8.28 (total US$31 lakh) has been used by 31st March 2009 while the remaining 4FCs were not utilized at all till 31.03.2009.”
There is no observation of the ld. DRP in para 3.7.1 which support the contention of the assessee that all forward contracts were duly honoured by delivery of contracts under USD. In this situation, in principle, we agree that in view of the ratio laid down by Hon’ble Supreme Court in the case of Woodward Governer (312 ITR 254), while the assessee is following mercantile system of accounting, the loss suffered by the assessee by fluctuation in the foreign exchange as on the date of balance sheet is an item of expenditure u/s 37(1) of the Act. Under this proposition and dicta of Hon’ble apex court, and facts emerging from the DRP order, we find it appropriate that the issue requires detailed examination and verification and calculation on scientific basis at the end of the AO/DRP in the light of relevant proposition and provisions of the Act. Therefore, relying on the said propositions and following the judgement of Hon’ble apex court in the case of Woodward Governor (312 ITR 254), we restore this issue to the file of AO/DRP for a fresh adjudication after factual analysis and examination of the impugned transactions after affording due opportunity of hearing for the assessee and without being prejudiced by the earlier orders.