2018 (7) TMI 122 - AT - Income Tax

Addition on account of exchange fluctuation loss - foreign exchange fluctuation loss on account of amount received from Head Office in EURO and repaid in EURO on account of differential value in INR - Held that - Hon ble Supreme Court in the case of CIT vs. Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the I.T. Act, which, clearly support our findings that assessee- company is entitled for deduction on account of foreign exchange fluctuation loss. It is an undisputed fact that assessee-company received the amount from Head Office in EURO and repaid to Head Office in EURO, therefore, even if the amount may be called by any name i.e., loan, borrowing or otherwise, but the assessee-company has suffered foreign exchange fluctuation loss on account of amount received from Head Office in EURO and repaid in EURO on account of differential value in INR, therefore, such fluctuation loss is allowable as deduction in favour of the assessee-company. Assessee-company is entitled for deduction on account of foreign exchange fluctuation loss. We, accordingly, set aside the orders of the authorities below and delete the entire addition. - Decided in favour of assessee.

Summary

Issues Involved:
1. Allowability of exchange fluctuation loss as revenue expenditure.
2. Nature of remittances from Head Office to Project Office and their classification as capital or loan.
3. Applicability of Article 7(3) of India-Spain DTAA.
4. Consistency in the treatment of exchange fluctuation loss in previous and subsequent assessment years.

Detailed Analysis:

1. Allowability of Exchange Fluctuation Loss as Revenue Expenditure:
The assessee, a non-resident company incorporated in Spain, operates in India through a Project Office (PE) and claimed an exchange fluctuation loss of ?16,10,71,640/- as a revenue expenditure. The assessee argued that the funds received from the Head Office in Spain were utilized for day-to-day operations and working capital required for executing projects, and thus, the fluctuation loss should be treated as a revenue loss. The Assessing Officer (A.O.) disagreed, stating that the remittances were capital contributions and not loans, and therefore, the loss could not be considered as a revenue expenditure.

2. Nature of Remittances from Head Office to Project Office:
The A.O. contended that the amounts received by the Project Office were capital contributions and not loans, as they were not borrowed from a third party. The A.O. referenced the Calcutta High Court decision in Betts Hartley Huett and Co. Ltd. vs. CIT, which stated that no person can enter into a contract with oneself, implying that the remittances could not be considered loans. The assessee, however, maintained that the funds were loans utilized for operational purposes and shown as liabilities in the balance sheet.

3. Applicability of Article 7(3) of India-Spain DTAA:
The A.O. invoked Article 7(3) of the India-Spain DTAA, which prohibits the deduction of expenses related to the Head Office except for actual expenses. The A.O. argued that the exchange fluctuation loss was a notional expense and thus not deductible. The assessee countered that Article 7(3) allows for the deduction of expenses incurred for the purpose of the PE, including interest and other similar expenses, and that the fluctuation loss was a real expenditure.

4. Consistency in Treatment of Exchange Fluctuation Loss:
The assessee highlighted that similar claims for exchange fluctuation loss had been allowed in previous assessment years (2012-2013 and 2013-2014) under section 143(3) of the Income Tax Act. The assessee also pointed out that in the subsequent assessment year (2015-2016), it had declared a foreign exchange fluctuation gain as income. The principle of consistency, as upheld by various judicial precedents, was argued to support the allowance of the fluctuation loss in the current year as well.

Judgment:
The Tribunal considered the submissions and evidence presented. It noted that the funds received from the Head Office were indeed used for operational purposes, and the fluctuation loss was a real expenditure. The Tribunal found that the A.O.'s reliance on the Calcutta High Court decision was misplaced, as the facts of the present case were distinguishable. The Tribunal also held that Article 7(3) of the India-Spain DTAA did not apply to the assessee's case, as the fluctuation loss was not a notional expense but a real one.

The Tribunal emphasized the importance of consistency in tax treatment and noted that the A.O. had accepted similar claims in previous years and had taxed the fluctuation gain in the subsequent year. The Tribunal concluded that the assessee was entitled to the deduction of the exchange fluctuation loss as a revenue expenditure.

Conclusion:
The Tribunal set aside the orders of the lower authorities and allowed the appeal of the assessee, thereby deleting the addition of ?16,10,71,640/- on account of exchange fluctuation loss. The judgment underscores the principles of consistency, the real nature of expenses, and the appropriate application of DTAA provisions in determining tax liabilities.