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TMI Blog2015 (4) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as part of the cost of Intangible assets - AO invoked the provisions of section 40(a)(i) to disallow the proportionate amount of depreciation on Intangible asset towards the additional cost paid by the assessee due to change in the foreign currency rate - Held that:- Whether there is a forex loss or gain, deduction of tax at source u/s 195 is contemplated only at the first stage of the credit of income to the account of the payee. The higher or lower liability due to foreign exchange loss or foreign exchange gain is inconsequential in so far as deduction of tax at source u/s 195 is concerned. Once there is no default on the part of the assessee in making deduction of tax at source on the additional amount paid due to foreign exchange loss, there can be no question of making any disallowance u/s 40(a)(i) of the Act. Section 32 of the Act provides for depreciation, inter alia, on intangible assets acquired on or after the 1st day of April, 1998, which are owned, wholly or partly, by the assessee and used for the purposes of the business or profession. It provides that depreciation shall be allowed in the case of any block of assets, at such percentage on the written down value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted the payment of royalty on exports made to AEs. In doing so, the TPO held the assessee to be a `Contract manufacturer . Accordingly, he opined that since the assessee is making a part of its sales to the related parties and the benefit of producing components is reaped by AE, the payment of royalty did not conform to the arm s length principle. He, therefore, proposed the TP adjustment amounting to ₹ 4,62,98,283/- in respect of payment of royalty for exports to AEs. The AO made the above additions by adopting the figures from the TPO s order as such without any further evaluation. The assessee is aggrieved against the making of such additions. 4. After considering the rival submissions and perusing the relevant material on record, we find that similar issues were raised in appeals by the assessee for the AYs 2008-09 and 2009-10, which came to be heard simultaneously with the instant appeal. We have passed separate order for the above referred two earlier years in which the question of determination of ALP in respect of Export commission has been restored to the file of AO/TPO with certain directions and the payment of royalty for exports to AE has been accepted at arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.22 crore. The AO observed that the assessee deducted tax at source u/s 195 of the Act only on the payment of ₹ 141.47 crore and no tax at source was deducted from the additional payment of ₹ 5.22 crore on account of fluctuation in foreign exchange rate. The assessee s contention that no tax at source was required to be deducted on additional liability falling on the assessee due to variation in the fluctuation in the foreign currency rate at the time of payment, did not find favour with the AO. He, therefore, disallowed depreciation on the corresponding amount of ₹ 5.22 crore, which resulted into disallowance of ₹ 130,67,871/-. The assessee is aggrieved against the disallowance made by the AO. 9. We have heard the rival submissions and perused the relevant material on record. The facts of the case lie in a narrow compass inasmuch as the assessee acquired the technical know-how and the invoice was raised in Japanese yen. At the time of acquisition, the assessee translated the invoice value from Japanese yen into Indian rupee at the rate prevailing at that time and credited the converted amount of ₹ 141.47 crore to the account of the supplier of kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of payment , whichever is earlier. Thus it is clear that the deduction of tax at source on a single transaction is contemplated at the earlier of the dates of credit or payment to the payee. It is not on both the occasions. Once deduction of tax at source has been made at the time of credit, which event occurs first, then there can be no question of once again making deduction of tax at source on full or in part at the time of payment. This position has been made clear by Rule 26 of Income-tax Rules, 1962 with the heading `Rate of exchange for the purpose of deduction of tax at source on income payable in foreign currency , which provides as under:- `For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income. Explanation : For the purposes of this rule, telegraphic transfer buying rate'', in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the deduction of tax at source should have been made at the later stage also on the additional liability when the assessee made payment. In our considered opinion, the Act does not require two phased deduction of tax at source on one transaction, one at the time of credit and second at the time of actual payment. Deduction of tax at source is required to be made only on one occasion, which in the context of section 195 is, earlier of the time of credit or the time of payment. Under such circumstances, the assessee cannot be called upon to deduct tax at source on the additional liability arising because of foreign exchange loss. If we take the contention of the Revenue to a logical conclusion, then every case of payment in convertible foreign exchange would require deduction of tax at source, firstly, at the time of credit and secondly, at the time when additional liability is fastened on it due to unfavourable rate of exchange. A very peculiar situation would arise, if instead of the assessee suffering forex loss, gets forex gain on account of favourable rate of exchange at the time of payment. Going by the viewpoint of the Revenue, in that case, it would become liable to refun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from- (i) the actual cost of the asset as defined in clause (1) of section 43; .................. and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: 13. The mandate of this provision is that where an assessee has acquired any asset from a country outside India and due to change in the rate of exchange after the acquisition of such asset, the amount by which the originally recorded liability increases or reduces, such increase or reduction shall be added to or deducted, as the case may be, from the actual cost of asset. The essence of this provision is that the payment made for the acquisition of an asset should be considered as actual cost of asset notwithstanding the increased or reduced cost recorded at the time of acquisition of such asset. In other words, if liability of the assessee is i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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