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TMI Blog2017 (8) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... the AADT between Malaysia and India ? 3. Whether in the facts and circumstances of the case and in law and in the light of the findings of the Tribunal that Royalty and interest income from Malaysia fall under exemption method, the provisions of AADT should be construed to apply to such income only at accrual stage and should not apply at the receipt stage in respect of exchange fluctuation ? 2. This Reference relates to Assessment Year 1991-1992. 3. The facts set out in the statement of case for our consideration are as under : "2. The Assessee is a Public Limited Company. In respect of accounting year ended 31.3.1991, relevant to Assessment Year 1991-92, the Deputy Commissioner of Income Tax (Assessment) Special Range1, Nagpur, completed the assessment u/s.143(3) of the Income Tax Act assessing the loss at Rs. 15,99,11,740/. During the relevant Assessment year, the Assessee/Company derived its income from manufacturing and sale of paper, stationery, glass, caustic soda, salt etc. besides income by way of royalty and interest from a joint venture Company viz. M/s. JG Containers (Malaysia) Sdn. Bhd., Malaysia. The Assessee/ Company had in the earlier years credited in its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of appreciation in the value of foreign currency held by it has to be treated as trading profit. Such profit would necessarily be different from the appellant's regular source of income in Malaysia i.e. royalty and interest. The Double Taxation Avoidance Agreement did not extend to cover such income. 7. The Tribunal has also affirmed the decision of the Assessing Officer and observed under para No.33, page 10 of the order dated 1931997 as under : " There is no doubt that interest and royalty income was a trading receipt in the hands of the assessee. But for the Double Taxation Avoidance Agreement this would have been charged to tax in the assessee's hands. The said income was treated as exempt only because it was covered by the Double Taxation Avoidance Agreement. That the agreement, however, does not cover the amounts accrued to the assessee as a result of exchange rate fluctuations. Moveover, the amount of Rs. 26,11,142/had arisen in India as the conversion took place in India. The said amount is, therefore, held to be taxable in the hands of the assessee". 4. It is on the above facts, that the Tribunal has at the instance of the applicant/assessee referred the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Years, but for earlier years. The amount attributable to royalty and interest under the AADT was duly accepted for the year in which it had accrued at the foreign exchange rate then prevailing. The receipt of the royalty and interest and conversion of Malaysian currency into Indian rupees later will be a benefit/income arising from a subsequent transaction in a different year and not related to the origin/source of the receipts. There is no continuation in the manner of the earning in Malaysia and gain on foreign exchange fluctuation arising out of the same transactions. (b) The Accounting Standard particularly AS-11 issued by the Institute of Chartered Accountants of India clearly indicates that any benefit derived on account of currency fluctuation beyond the year of receipt cannot be correlated to the original amount received. This benefit is on independent source of income; and (c) The entire issue is no longer resintegra as it stands concluded by the decision of the Apex Court in CIT vs. Woodward Governor India (P) Ltd., (2009) 312 ITR 254 in favour of the Revenue. 7. We have considered the rival submissions. It is clear from the Statement of the case sent by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute of Chartered Accountants of India which indicates that any benefit derived on account of currency fluctuation after the year of accrual is to be considered as income/expense in the period in which they arise. We would fruitfully reproduce extracts from the AS 11 which clarifies the issue as under : " 9.Exchange differences arising on foreign currency transactions should be recognized as income or as expense in the period in which they arise, except as stated in paragraphs 10 and 11 below. 10.Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which are carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of ASII which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h System of Accounting was followed, the receipt of royalty and interest from Malaysia including exchange rate differences would be recorded as income on the date of receipt/repatriation. However, merely because the Assessee followed the Mercantile System of Accounting, an amount received on exchange conversion on account of royalty and interest is being partly subjected to tax. This exigibility to tax under the Cash or Mercantile system of Accounting cannot be different. 13. This submission on the part of the Appellant/assessee overlooks the fact that although the Revenue would in cash system of accounting record the income only on receipt of the same, yet for the purposes of taxation it would split the amount received from Malaysia on account of royalty and interest in the year in which it arose/accrued at the rate prevailing then as one head of income and the income gained on account of exchange rate variation due to passage of time at the time of conversion as the other head of income. The Revenue would bring to tax the later gain arising on account of exchange rate variation to tax as income arising from a different source. The amount attributable to royalty and interest rece ..... X X X X Extracts X X X X X X X X Extracts X X X X
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