Case Law Details
Shin-Etsu Polymers India P. Ltd. Vs DCIT (ITAT Chennai)
We have observed that the authorities below have commented while disallowing these foreign exchange losses on conversion of outstanding balance in foreign currency into Indian rupee on the date of Balance Sheet as at year end to be on account of outstanding unsecured loans which were not paid by the assessee till the end of the previous year, but there are no further detailed elaborations on the same by authorities below as to whether these unsecured loans were raised towards acquisition of capital assets or on account of working capital requirements . Further, there are no elaborations whether the assets so acquired were within India or from countries outside India. It is also observed from the audited financial statements filed by the assessee before tribunal ( which are placed in file), from Schedule 14 which deals with Related Parties transactions that the assessee has raised External Commercial Borrowings(ECB) from its associated company abroad namely Shin-Etsu Polymer Co. Limited situated in Japan. We have also observed from Schedule 14 that the assessee has acquired fixed assets from its associated companies abroad, namely Shin-Etsu Polymer Co. Limited situated in Japan , Shin-Etsu Polymer situated at Malyasia, Shin-Etsu Polymer situated at Mexico , Shin-Etsu Polymer Shanghai Company Limited situated at China and Shin-Etsu Polymer , Singapore Pte Ltd situated at Singapore. The authorities below has commented that the said exchange difference loss on conversion of foreign exchange balance outstanding as at year end into Indian Rupee to the tune of Rs. 1,04,60,000/- which stood disallowed was on account of unsecured loans remaining unpaid, but detailed findings are not there as to complete break up and reasoning of the disallowance vis-à-vis Section 37(1), 43A and other applicable provisions of the 1961 Act. At this stage, it is pertinent to mention that Section 43A of the 1961 Act was amended by Finance Act, 2002 w.e.f. 01.04.2003. We are concerned with ay: 2011-12 and hence amended provisions of Section 43A of the 1961 Act shall apply. The Hon’ble Supreme Court in the case of CIT v. Woodward Governor India Private Limited (2009) 312 ITR 254(SC) and Oil and Natural Gas Corporation Limited v. CIT reported in (2010) 322 ITR 180(SC) has noted that the provisions of Section 43A of the 1961 Act were amended by Finance Act, 2002 w.e.f. 01.04.2003 and it starts with a non-obstante clause and the provisions of amended Section 43 A of the 1961 Act are mandatory in nature. If that be so , the treatment of the foreign exchange loss has to be in accordance with statutory provision as are contained in Section 43 A of the 1961 Act provided the conditions as are contained in Section 43A of the 1961 Act are met. Once statutory provisions are available in the 1961 Act itself, then they are to be followed provided all the conditions as are contained in the provision are met. The Income-tax laws being fiscal laws are to be strictly construed and there is no equity in taxation. Thus, in my considered view, the matter is to be set aside to the file of the AO for fresh determination of the issue wherein the AO is directed to give detailed findings and decision. The AO shall pass speaking, detailed and reasoned order in set aside proceedings after considering entire factual matrix of the case .
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 16, Chennai dated 24.09.2018 relevant to the assessment year 2011-12. The only issue involved in this appeal is that the ld. CIT(A) erred in confirming the disallowance of foreign exchange fluctuation loss as notional loss.
2. Brief facts of the case are that the assessee filed its return of income for the assessment year 2011-12 on 29.11.2011 declaring total income of ₹. NIL/-. The return of income filed by the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 [“Act” in short] was issued and served on the assessee. Since the assessee company had international transactions exceeding ₹.15 crores with their Associate Enterprises, the case was referred to the Transfer Pricing Officer under section 92CA of the Act. Accordingly, the TPO issued show cause notice and after considering various facts and circumstances, the TPO has opined that
“…. The case was discussed with the assessee’s representative. On examinations AE transactions of the assessee company is within arms length and hence no adjustment is considered necessary.”
Subsequently, due to change in incumbent, notice under section 143(2) r.w.s. 129 of the Act as well as notice under section 142(1) of the Act dated 05.02.2015 were issued to the assessee calling for various details. After considering the details filed by the assessee, the assessment was completed under section 143(3) of the Act assessing total loss of the assessee at ₹.2,73,95,214/- after making various additions. On appeal against the disallowance of Forex loss, after considering the submissions of the assessee, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer to the extent of ₹.1,04,60,000/-.
3. On being aggrieved, the assessee is in appeal before the Tribunal. The Counsel for the assessee has submitted that the ld. CIT(A) failed to appreciate that the forex loss were emanated due to fluctuation in the value of foreign currency in relation to Indian currency and also failed to consider the accounting standard 11 and simply confirmed the disallowance made by the Assessing Officer by stating that the assessee has not made any payment for such loans. He further submitted that the forex loss includes both realized and unrealized loss and the accounting treated for the same was in line with the accounting standard 11 as mandated by Schedule VI of the Companies Act and therefore, the claim of forex loss should be allowed and prayed for deleting the addition of ₹.1,04,60,000/-.
4. On the other hand, the ld. DR has submitted that the assessee re-valued its foreign exchange norms outstanding at the year-end in the Indian currency and claimed the difference between the respective amounts as on the 1st day of the assessment year and as on the last day of the assessment year as revenue loss under section 37(1) of the Act, which is not permissible under the law. Moreover, it was submitted that the assessee has not made any payment for such loans and it is a notional liability, which was not crystallized, cannot be allowed as loss under section 37(1) of the Act.
5. We have heard both the sides through video conferencing, perused the materials available on record and gone through the orders of authorities below including paper book consisting two case law. On perusal of the orders of authorities below, we find that the assessment order is very cryptic as the Assessing Officer has not given any clear findings about the nature of transaction, but, mentioned that it was only notional loss. On perusal of financials of the assessee, under “Schedule 12 – Administrative and Other expenses”, it has claimed foreign exchange loss – capital goods at ₹.1,32,32,000/- and foreign exchange loss – expenses at ₹.54,77,425/- totalling to ₹.1,87,09,425/-. It was the submission of the assessee that the foreign exchange loss includes both realized and unrealized loss and the accounting treatment for the same was in line with the accounting standard 11 as mandated by Schedule VI of the Companies Act. Therefore, the ld. Counsel prayed for allowing the claim of the assessee. However, no convincing explanation was brought on record with regard to the actual liability in the relevant financial year with details or the increased liability.
5.1 As relied on by the assessee, in the case of CIT v. Woodward Governor India (P) Ltd. 312 ITR 254, the Hon’ble Supreme Court summarized various factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates for the purpose of allowability of expenditure under section 37(1) of the Act when the assessee is following mercantile system of accounting. Applying those factors, as enunciated in the above case, to the facts in the case of Oil & Natural Gas Corporation Ltd. v. CIT 322 ITR 180, as relied on by the assessee, the Hon’ble Supreme Court has held that the loss claimed by the assessee on account of fluctuation in rate of foreign exchange as on date of balance-sheet was allowable as an expenditure under section 37(1) of the Act.
5.2 However, in the present case, even though the assessee may be following mercantile system of accounting, but, the parameters as envisaged in the case of CIT v. Woodward Governor India (P) Ltd. (supra) have been fulfilled or not was not emanating from the appellate order since the assessee has heavily relied on the decision in the case of Oil & Natural Gas Corporation Ltd. v. CIT (supra). Moreover, the assessee has not filed any detailed explanation in support of material evidence. In view of the above, we set aside the orders of authorities below and remit the matter back to the file of the Assessing Officer to examine the facts of the case in line with the decision of the Hon’ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. v. CIT (supra) as well as CIT v. Woodward Governor India (P) Ltd. (supra) and decide the issue afresh in accordance with law by affording an opportunity of being heard to the assessee. The assessee is also directed to produce all the details with proper explanation and evidence before the Assessing Officer for examination.
6. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced on 6th October, 2020 at Chennai.
[By separate concurring order]
Sd/-
(RAMIT KOCHAR)
ACCOUNTANT MEMBER
Chennai, Dated, 06.10.2020
Vm/-
Sd/-
(DUVVURU RL REDDY)
JUDICIAL MEMBER
1. My learned brother , Hon’ble Judicial Member has written his order and I concur with final decision of my learned brother Hon’ble JM for setting aside and remanding the matter back to the file of AO for fresh adjudication . However, albeit agreeing with the decision of my learned brother Hon’ble Judicial Member , I am proceeding to write this separate concurring order to further elaborate on certain additional vital facts which in my considered view are required to be brought by us in our order being last fact finding authority.
2. The effective dispute in this appeal filed by assessee with tribunal is with respect to denial of deduction on account of foreign exchange loss arising out of conversion of the balances outstanding in foreign exchange into Indian currency as at the year end to the tune of Rs. 1,04,60,000/- by AO as well learned CIT(A) terming the same to be notional loss . The learned counsel for the assessee on being asked by the Bench during the course of hearing before tribunal as to whether the said loss was incurred on transactions entered by the assessee in foreign exchange were on Revenue account or Capital account stated that the transactions were on Revenue account but fairly submitted that the said details are not emanating from the orders of the authorities below. The detailed break up of the said foreign exchange losses are also not filed by assessee before us for our perusal and decision. The learned counsel for the assessee has fairly stated and pleaded before us that the issue may be restored to the file of the AO for fresh determination wherein detailed observations, findings and decision can be made by the AO explicitly in its order while deciding on the allowability of the said foreign exchange loss to the tune of Rs. 1,04,60,000/- arising on conversion of outstanding balance in foreign exchange as at the year end into Indian currency wherein the AO.
3. We have observed that the authorities below have commented while disallowing these foreign exchange losses on conversion of outstanding balance in foreign currency into Indian rupee on the date of Balance Sheet as at year end to be on account of outstanding unsecured loans which were not paid by the assessee till the end of the previous year, but there are no further detailed elaborations on the same by authorities below as to whether these unsecured loans were raised towards acquisition of capital assets or on account of working capital requirements . Further, there are no elaborations whether the assets so acquired were within India or from countries outside India. It is also observed from the audited financial statements filed by the assessee before tribunal ( which are placed in file), from Schedule 14 which deals with Related Parties transactions that the assessee has raised External Commercial Borrowings(ECB) from its associated company abroad namely Shin-Etsu Polymer Co. Limited situated in Japan. We have also observed from Schedule 14 that the assessee has acquired fixed assets from its associated companies abroad, namely Shin-Etsu Polymer Co. Limited situated in Japan , Shin-Etsu Polymer situated at Malyasia, Shin-Etsu Polymer situated at Mexico , Shin-Etsu Polymer Shanghai Company Limited situated at China and Shin-Etsu Polymer , Singapore Pte Ltd situated at Singapore. The authorities below has commented that the said exchange difference loss on conversion of foreign exchange balance outstanding as at year end into Indian Rupee to the tune of Rs. 1,04,60,000/- which stood disallowed was on account of unsecured loans remaining unpaid, but detailed findings are not there as to complete break up and reasoning of the disallowance vis-à-vis Section 37(1), 43A and other applicable provisions of the 1961 Act. At this stage, it is pertinent to mention that Section 43A of the 1961 Act was amended by Finance Act, 2002 w.e.f. 01.04.2003. We are concerned with ay: 2011-12 and hence amended provisions of Section 43A of the 1961 Act shall apply. The Hon’ble Supreme Court in the case of CIT v. Woodward Governor India Private Limited (2009) 312 ITR 254(SC) and Oil and Natural Gas Corporation Limited v. CIT reported in (2010) 322 ITR 180(SC) has noted that the provisions of Section 43A of the 1961 Act were amended by Finance Act, 2002 w.e.f. 01.04.2003 and it starts with a non-obstante clause and the provisions of amended Section 43 A of the 1961 Act are mandatory in nature. If that be so , the treatment of the foreign exchange loss has to be in accordance with statutory provision as are contained in Section 43 A of the 1961 Act provided the conditions as are contained in Section 43A of the 1961 Act are met. Once statutory provisions are available in the 1961 Act itself, then they are to be followed provided all the conditions as are contained in the provision are met. The Income-tax laws being fiscal laws are to be strictly construed and there is no equity in taxation. Thus, in my considered view, the matter is to be set aside to the file of the AO for fresh determination of the issue wherein the AO is directed to give detailed findings and decision. The AO shall pass speaking, detailed and reasoned order in set aside proceedings after considering entire factual matrix of the case . We order accordingly.
3. In the result, the appeal filed by assessee in ITA No. 3090/Chny/2018 for ay: 2011-12 is allowed for statistical purposes.
Order pronounced on this 6th day of October , 2020 in Chennai.
