SC Johnson Products (P.) Ltd. v. DCIT – [2019] 103 taxmann.com 64 (Delhi – Trib.)

Assessee took a loan from its related concern, namely, SCJ Europe BV in financial year 2002-03. Said loan was repayable after five years.

In order to secure itself against fluctuation in foreign currency rate, assessee entered into hedging contracts with two banks. Both banks undertook to pay interest at fixed rate of 1.7 per cent on loan amount to creditor. In lieu of this, both banks charged a fixed amount determined on basis of interest and premium for hedging risk.

The Delhi ITAT held in favour of assessee as under:

The opening part of section 43(5) defines ‘speculative transaction’ to mean: ‘a transaction in which contract for purchase or sale of any commodity, including stocks and shares is periodically or ultimately settled otherwise than actual delivery or transfer of the commodity or scrips’.

In order to be covered within the ambit of section 43(5), it is sine qua non that contract for purchase or sale of any commodity should have been settled otherwise than by actual delivery. If there is no purchase or sale coupled with the obligation to settle it otherwise than by actual delivery, it ceases to be a speculative transaction.

It turns out that the ingredients of speculative transaction into were lacking. The assessee did not enter agreements with the two banks for sale or purchase of any commodity, which was to be settled otherwise than by the actual delivery.

It was a case of a hedging transaction and the consideration was for securing the assessee against any fluctuation loss in foreign currency and service of loan by means of interest. Thus, it was clear that the provisions of section 43(5) were clearly not attracted.