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TMI Blog2014 (3) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... , Income Tax Appellate 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 Income Tax Act, 1961?" 3. Respondent assessee M/s.Priyanka Gems was engaged in the business of export. The assessee filed the return of income for Assessment Year 2003-04 on 28.11.2003 declaring total income of Rs.5,13,00,591/-. This return was taken in scrutiny. One of the issues considered by the Assessing Officer pertained to the exchange rate difference. Assessing Officer noted that the assessee had received a net of Rs.71,23,361/- by way of exchange rate difference on the export made in the earlier year. At the same time, the assessee had incurred net loss of Rs.84,35,102/- due to exchange rate fluctuation on the exports made in the same year. After adjustments of the said two sums, the assessee claimed a negative income of Rs.13,11,741/- on account of exchange rate difference. The Assessing Officer thereupon inquired with the assessee why the said amount of Rs.71.23 lakhs (rounded off) being the exchange rate difference relating to the exports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f various issues by the Assessing Officer in his rather well written order. In the said order, the Assessing Officer based his conclusion on following factors:- (1) Section 80HHC of the Act deals with the sale proceeds of export. The exchange rate difference has no relation with the deduction under section 80HHC of the Act. (2) Section 80HHC pertains to current year's export profits. The amount in question is related to the proceeds of the earlier year's export, which was realized in the subsequent year. (3) As per explanation-2 to sub-section(2) of section 80HHC, the value of exported goods would be that declared in the shipping bills or the bills of exports. In the present case, such shipping bills would not reflect the exchange rate difference. (4) Deduction under section 80HHC is permitted on the profit derived from the export. Term "derived from" is construed strictly and has a different meaning than the term "attributable to". (5) Such receipt would also have to be excluded in view of clause (baa) of Explanation to section 80HHC. 5. The assessee carried the matter in appeal. CIT(Appeals) allowed the appeal relying on the decision of the Tribunal in the case of this very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the export business. (2) Such receipt does not fall within clause (baa) to the explanation and, therefore, cannot be excluded for the purpose of computation of the deduction. (3) Rule 115 of the Income Tax Rules, 1961 has no application for the purpose of computation of deduction under section 80HHC. (4) Explanation-2 below sub-section(2) of section 80HHC has no application because (i) the present case is not of branch transfer by the assessee to its foreign branch before eventually selling the goods to the foreign importer and (ii) in any case the Explanation refers to the value of goods declared in the shipping bills and not the price thereof. (5) In support of his contentions learned counsel relied on several decisions to which we would refer to at a later stage. 10. We also heard learned counsel Mr.R.K.Patel and Mr.Manish Shah who have elaborated such contentions. 11. As noted in the case of M/s.Priyanka Gems the objection of the Revenue to granting deduction under section 80HHC of the Act on the foreign exchange rate fluctuation gain primarily is on account of the realization of the sale proceeds happening in the year subsequent to the year during which the exports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Export House or Trading House. (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits Page 12 of 36 shall be an amount equal to- (i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii)Fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004. and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year." 13. Sub-section (1B) of section 80HHC provides for extent of deduction of the profits referred to in subsection( 1). Sub-section(2) pertains to the goods or merchandise to which the said section applies and reads as under: "(2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;" 16. In many cases when exports are made by an assessee, particularly, towards the fag end of the accounting year, it may not be possible to realize the sale proceeds of such exports before the end of the year. The period during which such remissions would be made may depend on various factors including the terms of the contract between the exporter and the importer. Such terms may also be bilaterally varied at times. The legislature, therefore, for the purpose of section 80HHC, recognized a period of six months for remissions in order to avail the benefit of deduction. Sub-section(2) of section 80HHC, therefore, provides for limit of six months from the end of the previous year for the foreign exchange to be remitted. Even such period was made extendible at the discretion of the competent authority, namely, the Reserve Bank of India or such other authority as may have been authorized for such purpose. For the purpose of claiming deduction under section 80HHC of the Act, therefore, one of the conditions would be that the foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt within a period of six months after the end of the previous year, or within further extended period, as sale proceeds relatable exports, it would not be open to revenue to raise such a controversy. The legislature in its wisdom has taken into consideration the fact that in case of exports made, sale proceeds are not necessarily realisable immediately within the accounting period in which exports have been made. 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 than the amount as reflected in the shipping bill. Hence, 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." It is true that the Court ultimately remanded the proceedings for consideration after verifying necessary facts. However, by no stretch can it be said that this judgment does not lay down the binding ratio. The Court in no uncertain terms held that the remittance which were covered within the period specified in sub-section(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention that the amount received by way of exchange rate fluctuation cannot be considered to be "any other receipt" as stipulated in clause (bba) of the Explanation to section 80HHC(4C). The reasoning is that once the Legislature has provided for treating a receipt within a period of six months after the end of the previous year or within further extended period, as sale proceeds relatable to exports, it would not be open to the Revenue to raise such a contention. We respectfully concur with the findings of the Gujarat High Court." 20. Independently also different High Courts have taken a similar view. As pointed out by the learned counsel for the assessees; in the case of Commissioner of Income-tax vs. Pentasoft Technologies Ltd. reported in [2012] 347 ITR 578(Mad), the Madras High Court considered a situation in the context of section 10A of the Act. The assessee due to diminished rupee value gained higher sum while earning foreign exchange. The question arose whether such difference in rupee value should be allowed as deduction under section 10A of the Act. The Court upheld the decision of the Tribunal making following observations:- "4. In order to allow a claim under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under:- "16.In view of the submissions at the Bar, we have examined the questions. The amount which is sought to be attributed as gain from fluctuation of foreign exchange no doubt might have been due to some fluctuation but as these are amounts received in Indian currency as the total amount that an exporter receives ultimately for the export of the goods, it should be taken together with the value of the goods itself in which event, in our opinion, even the amount said to be attributable to the fluctuation in the foreign exchange rate forms part of the value of the export goods and cannot be distinguished therefrom. In fact the converse of this, viz, if the fluctuation in foreign exchange brought down the value, an assessee cannot claim that this amount should be excluded and the export value maintained at a higher figure. 17. Though it may be an aspect beyond the control of the assessee or the Revenue, it does affect the actual value of the exported goods either way. We are of the opinion that the Tribunal has not committed any error on this aspect. Therefore, there is no occasion to exclude 90 per cent of the amount attributable to export gains from the foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative, would be duly adjusted. May be the accounting standards require that the same may be recorded in separate foreign exchange fluctuation account. Nevertheless any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre-decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and possibility of increase or decrease, in our opinion, can have no bearing on the source of such receipt. Primarily and essentially, the receipt would be on account of the export made. If this is so, any fluctuation thereof also must be said to have arisen out of the export business. Mere period of time and the vagaries of rate fluctuation in international currencies cannot divest the income from the character of the income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the same shall be telegraphic transfer of buying rate of such currency on the specified date. The term "specified date" has been defined in Explanation-2 to the said sub-rule (1). Rule 115 of the Income-tax Rules, 1962 thus has application for a specific purpose and has no bearing while judging whether foreign exchange rate fluctuation gain can form part of the deduction under section 80HHC of the Act. In case of Commissioner of Income-tax and others vs. Chowgule and Co.Ltd. reported in [1996]218 ITR 384, the Court held that rule 115 does not lay down that all foreign currencies received by the assessee will be converted into Indian rupees only on the last date of the accounting period. Rule only fixed the rate of conversion of foreign currency. If there is no foreign currency to convert on the last date of accounting period, then no question of invoking rule 115 will arise. 26. Reference to Explanation-2 below sub-section (2) of section 80HHC also is of no avail. Such explanation covers the cases where any goods or merchandise are transferred by an assessee to its branch office, warehouse or any other establishment situated outside India and thereafter sold from such branch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this context, it was held that the words " derived from" has narrower connotation as compared to the words "attributable to" by using the expression "derived from". Parliament intended to cover sources not beyond the first degree. 29. In case of Commissioner of Income-tax vs. Sterling Foods reported in [1999] 237 ITR 579, the Court held that the facts were that the assessee was engaged in the processing of prawns and sea food and exporting it. In the process the assessee earned import entitlements granted by the Government of India under Export Promotion Scheme. The assessee could use such import entitlements itself or sell the same to others. The assessee sold such entitlements and earned income and included such income for relief under section 80HHC of the Act. The Court held that such income cannot be said to have been derived from assessee's industrial undertaking. In the present case, however, we find that the source of the income of the assessee was the export. On the basis of accrual, income was already reflected in the assessee's account on the date of the export on the prevailing rate of exchange. Further income was earned merely on account of foreign exchange fluctu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation,is a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub-section (1) of section 80HHC. Both the Assessing Officer and the Commissioner of Income-tax (Appeals) have made a distinction, which merits emphasis. The exchange fluctuation, as both those authorities noted, arose subsequent to the transaction of export. In other words, the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise." 31. In the case of Universal Radiators vs. Commissioner of Income-tax reported in [1993]201 ITR 800, the assessee was engaged in the business of manufacturing radiators. For such purpose the assessee would import ingots. In transit the goods w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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