The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has allowed deduction in respect of net exchange losses to the Mondelez India Foods as the loss arising from the cancellation of forward contracts was arising in the normal course of business.
The assessee Mondelez India Foods Private Ltd (formerly known as Cadbury India Limited) was a subsidiary of Cadbury Overseas Ltd UK which holds 58.63% and Cadbury Mauritius Ltd which holds 38.97% of the equity shareholding while the balance 2.41% equity shareholding was held by Indian public company comprising of various shareholders. The assessee was incorporated in the year 1948 as Cadbury Fry (India) Private Limited. The assessee was in the business of manufacturing and marketing of malted food drinks, cake, powder chocolates, toffees, drinking chocolate and sugar confectionery.
During the year under consideration, the assessee had claimed a deduction in respect of net foreign exchange losses. The assessee submitted before the Assessing Officer that the assessee entered into forward contracts based on estimated raw material requirements as per the production schedule and if the production schedule was delayed, the assessee had rolled over / cancelled the forward contracts.
Towards the rolled over / cancelled forward contracts, the banks levies contract cancellation charges, i.e. the difference between the forward contract rate and the spot rate as on the date of cancellation of the contract. In cases where the spot rate was lower than the forward contract rate on the date of cancellation, there arises a foreign exchange fluctuation loss on cancellation of forward contracts and vice versa. The assessee submitted that out of the total loss claimed as above, a net loss was arising out of cancellation of forward contracts during the financial year relevant to assessment year 2011-12 and the same was recognised in the P&L Account.
The assessee also submitted that the loss on cancellation of forward contract was arising out of the normal course of business activity and not out of intention to earn more profits and accordingly the same should be allowed as business expenditure. The Assessing Officer did not accept the submissions of the assessee and proceeded to treat the loss as a speculative loss.
The Assessing Officer held that foreign exchange derivative transactions were speculative transactions unless it was proved by the assessee that it was covered by any Provisos (a) to (d) to Section 43(5) of the Income Tax Act. The Assessing Officer further held that the assessee was not able to substantiate that the loss was arising on account of forex derivative transaction and not hedging. The Assessing Officer further held that the assessee did not settle the future contracts but had chosen to terminate it and, therefore, the loss arising should be a speculation loss.
J.D. Mistri, on behalf of the assessee submitted that the issue was covered in favour of the assessee in assessee’s own case for A.Y. 2009-10 and the facts being identical for the year under consideration prayed for a similar relief.
The two-member Bench of Vikas Awasthy (Judicial Member) and Padmavathy S. (Accountant Member) noticed that the co-ordinate bench in assessee’s own case had considered a similar issue for A.Y. 2009-10in which the decision in London Star Diamond Co. (I) Pvt. Ltdwas followed.
The observation in that case was, “Broadly the loss was divided into two types and the adjudication of each subdivision of loss is given as under: (a) Loss on Cancellation of Matured FCs, relates to the FCs cancelled or terminated on or after the due date. In other words, the FCs booked as an integral part of the export invoices lived its booking period in full and they were either terminated by the Bank on or after the due date of maturity of the contract as the actual realisations were not received in time. These were not premature cancellations by the assessee and therefore, in our considered view, the said loss being related to the FCs which were integral or incidental to the exports of the diamonds, should be allowed as business loss.”
The Bench following the above decision, allowed this ground of appeal filed by the assessee holding that the loss arising from cancellation of forward contracts was arising in the normal course of business and accordingly, should be allowed as a deduction and disallowance made in this regard was deleted.
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