2014 (3) TMI 938 - HC - Income Tax

Deduction u/s 80HHC of the Act Receipts arising out of fluctuation of rate of foreign exchange - Whether the Tribunal was justified in holding that the receipt resulting out of exchange rate difference pertaining to the export made by the assessee was not the profit of business within the meaning of section 80HHC of the Act Held that - The decision in Commissioner of Income-Tax Versus Amba Impex 2005 (12) TMI 58 - GUJARAT High Court followed - As a corollary, by the time such sale proceeds are received within the prescribed time, by virtue of exchange rate difference there might be a situation where a larger amount is received that the amount as reflected in the shipping bill - merely because an amount is received in a year subsequent to the year of export by way of exchange rate difference, it does not necessarily always follow that the same is not relatable to the exports made. The foreign exchange gain arising out of the fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee - once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately - Under the accounting principles, the assessee, on the basis of accrual, would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates - The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. The Tribunal followed the judgement of assessee s own case in PRIYANKA GEMS. Versus ASSISTANT COMMISSIONER OF INCOME TAX 2004 (12) TMI 288 - ITAT AHMEDABAD-B was of the view that receipts on account of exchange rate difference is derived from the export sales and is part and parcel of export proceeds only, and by no stretch of imagination it can be given colour of income from other sources to be excluded from profits of the business in terms of Expln. (baa) below s. 80HHC(4A) of the Act - There is no distinction possible on the basis of different situations under which foreign exchange fluctuation may result - law permits hedging of foreign exchange fluctuation risk to an importer or an exporter - The exporter may take steps as found commercially prudent to safeguard himself against drastic foreign exchange rate fluctuations and in the process may also limit the possibility of gain in case of favourable currency rate trends - the resultant gain in foreign exchange rate would still be due to the export made by the assessee order of the Tribunal upheld - Decided against Revenue.

Issues Involved:
1. Deduction under section 80HHC of the Income Tax Act, 1961 concerning foreign exchange rate fluctuation receipts.
2. Whether such receipts are considered as business profits or income from other sources.
3. Applicability of clause (baa) to the explanation under section 80HHC.
4. Impact of the timing of receipt of foreign exchange on deduction eligibility.
5. Interpretation of Explanation-2 to sub-section (2) of section 80HHC.
6. Relevance of Rule 115 of the Income Tax Rules, 1962.

Issue-Wise Detailed Analysis:

1. Deduction under section 80HHC concerning foreign exchange rate fluctuation receipts:
The primary issue in all appeals was whether the foreign exchange rate fluctuation receipts are eligible for deduction under section 80HHC of the Income Tax Act, 1961. The court examined whether such receipts could be considered as profits derived from the export business. The assessee argued that these receipts should be included as part of export profits, while the Revenue contended that they should be excluded as they are not directly derived from the export business.

2. Whether such receipts are considered as business profits or income from other sources:
The Assessing Officer treated the foreign exchange rate fluctuation receipts as income from other sources and excluded 90% of such receipts for the purpose of deduction under section 80HHC. The Tribunal, however, held that these receipts were part of the export proceeds and should be included in the business profits. The court upheld the Tribunal's view, stating that foreign exchange gains directly relate to the export business and cannot be treated as income from other sources.

3. Applicability of clause (baa) to the explanation under section 80HHC:
Clause (baa) of the explanation to section 80HHC specifies the exclusion of certain incomes from the profits of the business for deduction purposes. The court analyzed whether foreign exchange fluctuation receipts fall under the category of "any other receipt of a similar nature" as mentioned in clause (baa). It concluded that foreign exchange gains are not similar to brokerage, commission, interest, rent, or charges and thus should not be excluded under clause (baa).

4. Impact of the timing of receipt of foreign exchange on deduction eligibility:
The court considered whether the timing of the receipt of foreign exchange (whether in the same year as the export or a subsequent year) affects the eligibility for deduction under section 80HHC. It was held that the timing does not change the nature of the receipt, and as long as the remittance is made within the time permitted under sub-section (2) of section 80HHC, it should be considered as part of the export profits.

5. Interpretation of Explanation-2 to sub-section (2) of section 80HHC:
Explanation-2 pertains to the value of goods declared in the shipping bill or bill of export. The court clarified that this explanation applies only in cases where goods are transferred to a branch or establishment outside India before being sold to a foreign importer. In the present cases, since there was no such transfer, Explanation-2 was deemed inapplicable.

6. Relevance of Rule 115 of the Income Tax Rules, 1962:
The assessee contended that Rule 115, which deals with the conversion rate of foreign currency, has no bearing on the computation of deduction under section 80HHC. The court agreed, stating that Rule 115 is relevant for calculating the value of income in Indian rupees but does not affect the inclusion of foreign exchange gains in export profits for deduction purposes.

Conclusion:
The court upheld the Tribunal's decision that foreign exchange fluctuation gains are part of the export profits and eligible for deduction under section 80HHC. It rejected the Revenue's contention that such gains should be treated as income from other sources or excluded under clause (baa). The timing of receipt and applicability of Rule 115 and Explanation-2 were also clarified, favoring the assessees. All tax appeals were dismissed, affirming the inclusion of foreign exchange gains in the export profits for deduction purposes.

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