Pune Tribunal upholds tax deductibility of MTM exchange fluctuation loss on forex loan borrowed to reduce interest cost and hedge export receivables

This alert summarizes a recent ruling of the Pune Income Tax Appellate Tribunal (Tribunal) in the case of Cooper Corporation Pvt. Ltd. (Taxpayer) on the issue of tax deductibility of marked-to-market (MTM) exchange fluctuation loss on foreign currency loan borrowed to repay earlier rupee loans with a view to reduce interest cost and hedge export receivables.

The Tribunal noted that, as per the settled law under Indian tax jurisprudence, exchange fluctuation loss on revenue item is deductible for tax purposes, though exchange fluctuation loss on capital item is not deductible. The Tribunal allowed the deduction of MTM loss on the ground that such loss has direct nexus to saving in interest-costs which is a revenue item. The Tribunal further held that MTM loss being recognized in books of account, under the mandate of accounting standard notified under Companies Act as per the mercantile system of accounting, cannot be regarded as notional or contingent loss.