Validity of SAFE model with reference to future and forward contracts

A Derivative contract is a contract whose value is ‘derived’ or is based on an agreed underlying

financial asset. It mainly includes three types of contracts - Future contract, forward contract
and option contract.

A future contract is a legal agreement to buy or sell a particular commodity or asset at a

predetermined price at a specified time in the future. It is also known as standardised contracts.
Mostly used by hedgers and speculators.

A forward contract is a customized contract between two parties to buy or sell an asset at a
specified price on a future date. It is a private agreement between two parties to buy and sell an
asset at a specified price in future. Mostly used by hedgers.

Main Differences between Future and Forward Contracts:

1) Future contracts are traded on exchanges while forward contracts are private agreements
between two parties.

2) The value is marked on a daily basis in case of future contracts while in case of forward
contracts, the value is settled over a range of dates.

In the case of Commissioner of Income Tax, Thiruvanthapuram v Olam Agro India Limited,
Kollam (October 6, 2017), the Kerala High Court held that the loss incurred in case of derivative
transactions will be allowed as deduction thereby validating the concept of forward, future and
option contracts in India.

Similar ruling was also given by the ITAT, Mumbai in the case of Arjav DIamonds (India) Pvt. Ltd.
Mumbai v ADDL CIT 5(1), Mumbai that allowed the cancellation of forward contracts to be
treated as normal loss instead of speculative loss.

SAFE model being a forward contract:

In light of the above discussion, it is safe to conclude that SAFE model is of the nature of forward
contract and not future contract because it is a customised agreement between two parties.
Forward contracts, being valid in India, SAFE model can also be treated to be a valid kind of
forward contract in India.