The Tax Publishers2023 TaxPub(DT) 537 (Del-Trib)

INCOME TAX ACT, 1961

Section 36(1)(iii)

As per the foreign currency swap contracts, the assessee was required to pay interest at a fixed rate in Rupee terms. Whereas, it was the liability of the BTMU to pay the principal as well as interest cost on the foreign currency loans availed of by assessee from MELCO in Japanese Yen. Therefore, amount paid to BTMU under currency swap contracts was nothing but interest cost on foreign currency loans dedductible under section 36(1)(iii).

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Premium paid to foreign bank in respect of currency swap contracts in relation to ECBs -

Assessee 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 exposure on long term borrowings, assessee executed currency swap contracts with Bank of Tokyo, Mitsubishi UFJ (BTMU) on 07-6-2012 and 01-1-2013. As per the terms and conditions of currency swap contracts, assessee was obliged to pay fixed amount of rupee denominated installment to BTMU. Whereas, obligation to repay the principal and interest amount in foreign currency to MELCO was placed with BTMU. It was explained by assessee to AO that as per the swap contracts, the assessee was required to pay interest @ 7.35% or 7.59%. However, for accounting purposes, aforesaid rates of interest were bifurcated into two portions, the first one as interest and the other one as premium. However, the entire amount was in the nature of finance cost. AO did not accept the contention of assessee. He obseerved that availing of loan from MELCO and the currency swap contracts were two independent transactions. While assessee has incurred interest cost on ECBs, however, currency swap transactions are only for purpose of hedging the risk on repayment of foreign loans and repayment thereon. Therefore, AO held that premium paid to BTMU in respect of hedging contracts are not covered under section 36(1)(iii). Further, he held that amount paid to BTMU is in respect of speculative transaction under section 43(5).Held: As per the foreign currency swap contracts, the assessee was required to pay interest at a fixed rate in Rupee terms. Whereas, it was the liability of the BTMU to pay principal as well as interest cost on the foreign currency loans availed of assessee from MELCO in Japanese Yen. Therefore, amount paid to BTMU under currency swap contracts was nothing but interest cost on foreign currency loans. Underlying transactions in relation to the currency swap contracts are the loans availed from MELCO. It is a fact on record that on repayment of loan to MELCO after the expiry of three years, the currency swap contracts with BTMU were also terminated. Therefore, currency swap contracts were nothing but to hedge the fluctuation in foreign currency rates for protecting the assessee from the risk of paying more interest on the foreign currency loans due to exchange rate fluctuations. Therefore, transactions relating to currency swap contracts entered by assessee with BTMU could not be considered to be in the nature of speculative transaction covered under section 43(5). Even for the sake of argument assuming that the premium paid to BTMU in respect of currency swap contracts could not be termed as interest covered under section 36(1)(iii), however, there cannot be any dispute that this was an expenditure incurred by the assessee wholly and exclusively for the purpose of its business, as, such expenditure was having a direct nexus with the finance cost on external borrowings. That being the case, it was otherwise allowable as deduction under section 37(1).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2013-14


INCOME TAX ACT, 1961

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